Speculative attack
Topic: Balance of Payments and Exchange Rates · NCERT: Class 12, Ch 6 "Open Economy Macroeconomics"
Meaning
A speculative attack is heavy, sudden selling of a currency by speculators who doubt that a fixed exchange rate can last. They believe the central bank's reserves are too small to defend the rate. So they sell the home currency and buy foreign exchange, which drains the reserves even faster. If reserves run low, the government is forced to devalue. The speculators then profit by buying back the currency at a cheaper price. A fixed rate works only while people believe the government can hold it.
Example
On 16 September 1992, "Black Wednesday", speculators sold the pound so heavily that Britain had to leave the European Exchange Rate Mechanism (ERM). On 2 July 1997, Thailand had to float the baht after a similar attack, which triggered the Asian financial crisis.
Don't confuse with
- Currency speculation: the general practice of holding a currency to profit from expected changes in its value. A speculative attack is a large, concentrated form of speculation aimed at breaking a fixed rate.
Related concepts
- Fixed exchange rate
- Devaluation
- Revaluation
- Black market for foreign exchange
- Managed floating
- Forex intervention
- Crawling peg
- Currency board
- Impossible trinity
- Competitive devaluation