* Dollar peg working normally, no large outflows - HKMA
* Economic headwinds in protests, trade war - finance chief (Adds quotes, context)
By Noah Sin and Donny Kwok
HONG KONG, Aug 7 (Reuters) - The Hong Kong dollar peg with the U.S. dollar is working normally despite recent market volatility and street protests, but the local economy is showing signs of strain, officials said on Wednesday.
Hong Kong’s currency steadied on Tuesday and Wednesday, after shedding 0.2% on Monday, its largest daily fall since 2016, because of the escalating U.S.-China trade war and the sharp Chinese yuan depreciation.
The currency is pegged at a tight range of 7.75-7.85 to the greenback.
Arthur Yuen, deputy chief executive of Hong Kong Monetary Authority, told reporters this arrangement is working smoothly despite market swings.
“We haven’t seen any huge movement of capital flowing in and out, and we don’t see any pressure for the time being,” he said. “We are confident, whether in our banking or monetary system, we can deal with potential volatility.”
While yuan weakness could increase Chinese exports and benefit Hong Kong, a re-export hub, it would also dampen spending appetite of Chinese tourists in the city, Paul Chan, financial secretary, said at the same news conference.
“The economic situations, both externally and domestically, (was) challenging in July,” said Chan, citing the trade war and local social unrest.
The official warned that Hong Kong could be heading towards a recession later this year.
“That is causing some concern and we (would) just like to highlight the risks to our people,” he said.
Hong Kong is facing its worst crisis since it returned from British to Chinese rule in 1997, Beijing’s top official said on Wednesday. Retail sales and tourist numbers took a knock in June, data shows. (Additional reporting by Twinnie Siu; Editing by Richard Borsuk)