Currency speculation
Topic: Balance of Payments and Exchange Rates · NCERT: Class 12, Ch 6 "Open Economy Macroeconomics"
Meaning
Currency speculation means buying and holding a currency in the hope of gaining when its value rises. Money is an asset, so people buy it for expected gains, not just to pay for goods. Such expectations can be self-fulfilling. When many people expect a currency to rise and buy it, the extra demand pushes it up today.
Example
The pound is at ₹80, and investors expect it to reach ₹85 by the end of the month. A speculator buys 1,000 pounds for ₹80,000 and later sells them for ₹85,000, earning a ₹5,000 profit. Because many investors buy pounds at once, the pound rises right away.
Don't confuse with
- Carry trade: a carry trade profits mainly from the gap between interest rates. Speculation bets on a change in the exchange rate itself.
Related concepts
- Foreign exchange market
- Foreign exchange
- Foreign exchange rate
- Demand for foreign exchange
- Supply of foreign exchange
- Flexible exchange rate
- Currency depreciation
- Currency appreciation
- Interest rate differential
- Interest rate parity