* Hong Kong dollar posts steepest rise in a more than a year
* China investment, calming unrest and falling dollar support HKD
* HKD crosses peg midpoint to hit as high as 7.7980 per dollar
* GRAPHIC: https://tmsnrt.rs/2RMhx1c (Recasts and writes through with analyst comments and background)
By Noah Sin and Winni Zhou
HONG KONG/SHANGHAI, Dec 12 (Reuters) - The Hong Kong dollar hit a five-month high on Thursday as investment flows from China, cooling unrest and a global unwinding of long positions in the greenback roused the normally sleepy currency into its sharpest rally in more than a year.
The Hong Kong dollar firmed almost 0.4% in two sessions to hit as high as 7.7980 per dollar.
That is some jump for a managed currency that is pegged within a 7.75-7.85 range against the greenback, with the late-Wednesday move its steepest intraday rise since September 2018.
It also stands out for the absence of any obvious liquidity squeeze in the city, which can often be responsible for volatility since the currency peg tends to deter day traders.
"It is different from the usual tight funding story, as funding isn't reflecting such tightness," said OCBC economist Tommy Xie, pointing to stable swap rates.
"HKD conversion seems to be the suspect. The size and style of execution feel like it," he said.
Also lending support, tensions in the Chinese-ruled city have cooled somewhat in the last few weeks, after six months of often violent anti-government demonstrations.
Globally on Thursday, investors also rushed to quit long dollar positions after the U.S. Federal Reserve indicated it would keep interest rates accommodative next year.
There was also a year-end closedown in "carry" trades, where investors borrowing in places with low interest rates, such as Hong Kong, to fund the purchase of potentially higher-yielding assets denominated in U.S. dollars.
"The whole market has been long dollars and short Hong Kong dollars, given all of the negative events we've seen there over the last several months," said Stuart Oakley, global head of flow FX at Nomura in Singapore.
"I think a lot of those positions are being closed out or stopped out as people want to consolidate their positioning and reduce risk into the holiday season."
HK IN DEMAND
Hong Kong has been roiled by six months of anti-government protests that show no signs of letting up, even though violence has dimmed in recent weeks following a thumping victory for government opponents at local elections.
Yet in spite of it, and despite the protracted Sino-U.S. trade war hammering the prospects of many locally listed companies, Chinese investors have been pouring in cash.
Data from the Hong Kong Stock Exchange shows mainland investors have more than doubled Hong Kong stock purchases this year, which requires first buying Hong Kong dollars.
The successful listing of e-commerce giant Alibaba last month also boosted confidence, said Kiyong Seong, Asia rates strategist at Société Générale.
"Concerns about the immediate demise of Hong Kong as an international financial centre, which had been quite heightened, have softened," he said. "Which also provides some foundation for the Hong Kong dollar to strengthen."
Hong Kong's Hang Seng Index also surged ahead of other Asian markets on Thursday, gaining 1.3%.
Other traders speculated that Chinese firms fearful of Sino-U.S. tensions flaring had sought to shift deposits from greenbacks into Hong Kong dollars, or that forthcoming government stimulus could spur demand for the local currency.
The Hong Kong Monetary Authority (HKMA) said on Thursday that the city's foreign exchange and money markets continue to operate smoothly.
It kept the benchmark interest rate unchanged, in line with the Fed's decision on Wednesday. The city's monetary policy moves in lock-step with that of the United States because of the currency peg.
(Reporting by Noah Sin in Hong Kong and Winni Zhou in Shanghai; Additional reporting by Donny Kwok in Hong Kong; Additional reporting and writing by Tom Westbrook in Singapore; Editing by Kim Coghill and Alex Richardson)