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Another day, another currency manipulation -- or two

Section: Daily Dispatches

Drop in Hong Kong Dollar
Was 'Stage-Managed,' UBS Says

By Jake Lee
Bloomberg News Service
Wednesday, January 24, 2007

HONG KONG -- 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 after it rose above 7.8 against the U.S. dollar on Jan. 11, the central exchange rate in the port city's currency system. The Hong Kong dollar fell to 7.8122 on Jan. 19, the lowest in 15 years, damping speculation that it will come under appreciation pressure. Hong Kong Monetary Authority Chief Executive Joseph Yam last week said his body hasn't sold the 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 7.8024 per U.S. dollar as of 11:14 a.m. local time, compared with the Chinese yuan's rate of 7.7732 per dollar. Hong Kong's currency is allowed to trade 5 cents either side of 7.8 to the U.S. dollar.

Anderson, who published a report on the Hong Kong dollar yesterday and has previously worked for the International Monetary Fund and Goldman Sachs Group Inc., says the Hong Kong currency won't weaken much further and sees the yuan climbing to 7.5 by year end. That's more bullish than the 7.77 median forecast of 18 economists surveyed by Bloomberg News.

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's 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.

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

The city introduced the peg on Oct. 17, 1983, after the currency slumped 48 percent against the 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 are no plans 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 7.8, and we don't see a need to do anything."

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.

"There's no reason for the spread to exist," said Anderson. "It's highly unusual, and will probably go close to zero in the coming months."

Craig Chan, Lehman Brothers Holdings Inc.'s Asian-currency strategist, disagrees and says the 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 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."

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Argentine Peso Declines
on Central Bank Dollar Purchases

By Matthew Craze
Bloomberg News Service
Tuesday, January 23, 2007

BUENOS AIRES -- Argentina's peso weakened for a fourth day as the central bank stepped up dollar purchases.

Banco Central de la Republic Argentina bought $2.2 billion in the past three weeks to boost its foreign reserves and to prevent a peso rally that would threaten the country's export growth. The purchases are almost double the $1.2 billion the bank bought in the previous three weeks.

"The central bank has been the main driver in demand" for the dollar, said Nicolas Coyan, head of trading at Banco Industrial in Buenos Aires.

The peso fell 0.1 percent to 3.097 pesos the dollar at 1:09 p.m. New York time, leaving it down 0.6 percent in the past four days. Coyan predicts the peso will weaken to 3.10 pesos per dollar by March as the central bank keeps buying dollars.

Argentina's foreign reserves climbed to $33 billion yesterday from $18.6 billion in January 2006. Much of the dollars the central bank is buying are flowing in from the country's trade surplus. The government said yesterday that the surplus widened to $1.48 billion in December from $872 million in November.

The surplus was bigger than the $990 million median forecast in a Bloomberg survey of nine economists.

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