Speculative attack
From Wikipedia, the free encyclopedia
A speculative attack involves massive selling of domestic currency assets by both domestic and foreign investors. Countries that utilize a fixed or floating exchange rate are equally susceptible to a speculative attack. Nevertheless, if a government chooses to maintain a fixed exchange rate during a speculative attack, they risk the chance of severe economic depression or financial collapse, as illustrated by the Argentinean and East Asian financial crises.
A speculative attack has much in common with cornering the market, as it involves building up a large directional position in the hope of exiting at a better price. As such, it runs the same risk: a speculative attack relies entirely on the market reacting to the attack by continuing the move that has been engineered, in order for profits to be made by the attackers. In a market that is not susceptible, the reaction of the market may, instead, be to take advantage of the change in price by taking opposing positions and reversing the engineered move. This may be assisted by aggressive intervention by a central bank, either directly through very large currency transactions or through raising interest rates, or by activity by another central bank with an interest in preserving the current exchange rate. As in cornering the market, this leaves the attackers vulnerable
[edit] References
[1] Bank of Portugal report on the defense of the Portuguese Escudo in the European exchange rate mechanism
[2] Federal reserve bank of San Fransisco article on the failed attack on the Hong Kong dollar
[3] IMF report on emerging market currency crises
[edit] See Also
- Speculation in financial markets
