Speculative Attack

bitrex

I don't have a lot of knowledge about economics, and I'm trying to understand the concept of a "speculative attack" on a currency. I've read the Wikipedia article and I'm still not understanding the concept - can anyone provide an example of how such an attack works and how investors profit from it? Thank you!

marianiiina

As far as I know, when theres buzz about a devaluation, uncertainty, a bad economic situation in the country, etc. the attacker -speculator- sells the national money and buys reserves (trades national currency for central bank bonds). Basically, you create a positive feedback to further devaluate the currency and to have higher profits:

So, the attacker trades its national currency money for reserves at the current rate. Then, the national currency devaluates. After the attack, they sell it at a higher rate.

Fixed echange rate economies suffer a lot with these attacks, because if the rate is fixed you need even MORE reserves to leave your money price stable.

And then you have a balance of payments or "currency" crisis. Basically investors which where holding the reserve fixed flee when they presume the rate is going dooooown so it's even worse for that economy.

Examples:

Mexico economic crisis december '94: capitals flee, Central Bank wants the peso stable so reserves go down down. Zedillo had to stop supporting the peso, it widened its flotation band and let it float to combat the especulative attack. It actually even affected other currencies (tequila effect). Another example is Argentina 1999-2002