What is a speculative attack?
A speculative attack occurs in the foreign exchange markets when speculators attack the currency of a country attempting to maintain a fixed, or pegged exchange rate. If the country does not hold enough foreign currency reserves to buy enough of its domestic currency, the attack can result in the peg failing.
Where have you heard about a speculative attack?
The best known speculative attack, and one of the most famous trades of all time, was George Soros’ attack on the British pound in 1992 where he sold at least $1.5 billion of the U.K. currency. This resulted in ‘Black Wednesday’, when the British government withdrew from the Exchange Rate Mechanism.
What you need to know about a speculative attack.
Speculative attacks do not always succeed. Soros’ trade was successful because the Bank of England’s attempts to prop up the pound failed, even though it bought £1 billion worth of its own currency within two hours of the market opening on Black Wednesday. It raised interest rates to make the pound more attractive, but this failed too. In contrast, when a huge attack took place against the Hong Kong dollar in 1997, the combination of the ability to source large amounts of currency from China and interest rates that hit 50 per cent meant the central bank successfully defended itself.