Currency Crisis
What is a currency crisis?
It's a sharp decline in the value of a country's currency, meaning that one unit of the currency no longer buys as much as it used to in another. The crisis becomes more serious if doubts arise over the central bank's ability to manage the situation.
Where have you heard about currency crises?
Currency crises have been occurring more and more often since the South American debt crisis of the 1980s. The Latin American currency crisis of 1994 is one well-known example, and the Asian financial crisis of 1997 is another.
What you need to know about currency crises...
Currency crises are caused by a range of underlying factors, from central bank policies to sheer market speculation. But the main cause of a currency crisis is a central bank's failure to maintain a fixed rate peg to an often floating rate foreign currency. Crises can also evolve from a central bank's desire to prop up its currency's value to keep investment capital within its borders.
Currency crises can often be solved by floating the exchange rate and adopting monetary policies that aren't fighting the market.
