Two fund management houses have been reproached by the Hong Kong Monetary Authority for helping their clients speculate against the Hong Kong dollar a week ago, a source close to the authority says. The two houses - believed to be United States-based firms - were warned that their mandate to manage part of the Exchange Fund might be taken away if they continued to undermine the dollar's stability. The speculation took place on July 18 when the dollar came under mild selling pressure locally but stronger pressure in New York and London after the local market had closed. The pressure pushed the local currency to an unusually low level of 7.762 to the US dollar, triggering concern that the currency turmoil plaguing other Asian countries could be spreading to Hong Kong. The Hong Kong dollar usually hovers around 7.740-7.750 to the US dollar. The authority is understood to have traced the selling positions to fund managers stationed in New York, which later said they were acting on behalf of customers. 'The way they conducted the selling was aimed at de-stabilising the currency [the Hong Kong dollar],' the source said. 'They waited until the local market was closed. Then they started selling at the same time, about 6pm to 7pm. 'Instead of informing the authority of such selling, they decided to conduct it quietly,' he said. The fund managers had not borrowed the necessary Hong Kong dollars before they sold them short. After tracing the source of the selling, the authority pushed interest rates higher last week to increase the cost of financing the speculation and to alert other banks to its wrath. The authority withdrew liquidity from the money market, forcing interbank overnight rates to go up to 6.5 per cent on Monday and 7 per cent on Tuesday. Subsequently, no banks were prepared to take the risk of lending to the fund managers, who scurried to cover their short positions. 'Realising they could not borrow Hong Kong dollars, they had to sell US dollars and put up with the losses,' the source said. The amount lost by the fund managers is not known. The exchange rate has since steadied but the authority is still believed to be concerned that the disruption to interest rate levels is destabilising the market. Through the Real Time Gross Settlement system, the authority has a clear picture of banks' daily clearing balances. Any significant changes in the balances, which could be the result of lending Hong Kong dollars to speculators, quickly become apparent. The fund managers were later warned that similar action in future would result in losing the business of managing part of the Exchange Fund's reserves.