Jan. 24 (Bloomberg) -- The Hong Kong dollar's drop to the lowest since 1991 was ``stage-managed'' to deter speculators from betting the city's 23-year-old link to the U.S. dollar will end, said Jonathan Anderson, UBS AG's chief Asia economist.

China's central bank has allowed faster gains in the yuan since Jan. 11, when it rose beyond 7.80 against the U.S. dollar, the central exchange rate in the city's currency system. The Hong Kong dollar fell to 7.8122 on Jan. 19, the lowest in 15 years, dousing speculation it will come under appreciation pressure. The Hong Kong Monetary Authority today it said hadn't sold its currency.

``All the indications are that the authorities are doing it,'' said Anderson in an interview yesterday. ``That's what I'd do, accelerate the movements so it doesn't give the market a chance to go crazy and think the Hong Kong dollar is going to start going up as well.''

The Hong Kong dollar fell 0.44 percent last week against the Chinese currency to HK$0.9955 per yuan, the biggest drop since China scrapped the yuan's decade-long peg to the dollar in 2005. It was at 7.8016 per U.S. dollar at 3 p.m. local time, compared with the Chinese yuan's rate of 7.7725 per dollar. Hong Kong's currency is allowed to trade 5 cents either side of 7.80 to the U.S. dollar.

Currency Cooperation

It's likely there was cooperation between the People's Bank of China and the HKMA before the yuan broke past equal value with the Hong Kong dollar, says Anderson. HKMA Chief Joseph Yam and China's central bank Governor Zhou Xiaochuan have been working on an agreement to sell yuan-denominated bonds in Hong Kong that was signed in Beijing on Jan. 16.

Anderson, who has previously worked for the International Monetary Fund and Goldman Sachs Group Inc., published a report on the Hong Kong dollar yesterday and said the currency won't weaken much further, while he sees the yuan climbing to 7.50 by year-end. That's more bullish than the 7.77 median forecast of 18 economists surveyed by Bloomberg News.

``The key now is for the yuan to keep moving up, in an expedited manner,'' said Anderson, who is based in Hong Kong. ``The Hong Kong dollar probably won't weaken much more.''

The city introduced the peg on Oct. 17, 1983, after the currency slumped 48 percent against the U.S. dollar in the nine previous years as China asserted its claim to the former British colony. Since then, the link has weathered the 1987 Black Monday stock-market crash, the Tiananmen Square massacre of 1989 and the city's handover to Chinese sovereignty in 1997. Yam said last week there is no plan to change the peg.

``We have not intervened in the Hong Kong dollar,'' said Yam on Jan. 18. ``The Hong Kong dollar is not weak, it's just on the weak side of 7.80, and we don't see a need to do anything.''

The HKMA declined to comment on the UBS report, said a spokesperson, who asked not to be identified.

Rates Spread

Since the yuan surpassed parity, the discount for banks to borrow in Hong Kong dollars for a year compared with the U.S. dollar has narrowed to 1.1 percentage points, reflecting demand for the former colony's currency. Because the Hong Kong Monetary Authority keeps the Hong Kong dollar pegged to the U.S. dollar, there should be no difference in borrowing costs.

By weakening the currency, the HKMA may be showing it is committed to defending the peg as the yuan rises, said Anderson. He sees the rate difference shrinking to near zero, in part as some investors cut bets the Hong Kong dollar will be allowed to appreciate. The one-year Hong Kong dollar forward has weakened to HK$7.71, from as strong as HK$7.68 last month, the strongest since Feb. 2005.

``There's no reason for the spread to exist,'' said Anderson. ``It's highly unusual.''

Lehman Disagrees

Craig Chan, Lehman Brothers Holdings Inc.'s Asian-currency strategist, disagrees and says the rate gap may widen as speculation stays that the Hong Kong dollar will appreciate. He sees the currency rising to as strong as 7.75 in the next six months.

``Hong Kong's economy is strongly tied with that of China, so if we're going to see consistent pressure on the yuan to rise, then there'll also be some on the Hong Kong dollar,'' Chan said in an interview in Hong Kong. ``The widening of the interest gap with the U.S. is going to continue as people pile into Hong Kong, pushing the rate down there.''

To contact the reporter on this story: Jake Lee in Hong Kong at jlee127@bloomberg.net.

Last Updated: January 24, 2007 02:02 EST