Speculation on money markets

Exchange rate speculation
Foreign currency speculation
Uncontrolled power of forex markets

Nature

Currency traders derive their income from volatility, namely the swings in the value of currencies that are bought and sold.

Incidence

Foreign exchange markets daily turnover was almost $180 billion in 1989. Only about 20% of that daily business is concerned with paying for imports and exports, the rest is speculative. In 1992 a new study in the UK indicated that dealings had reached $1,000 billion per day, namely 50% more than in 1989, only a small fraction of which was linked to actual transactions over goods or services. A mid 1993 study estimated $350 billion circulating through the foreign exchange market on an average day. In July 1993 the French government unsuccessfully attempted to defend the French franc against an attack by speculators in an action which virtually eliminated its currency reserves and left it deeply in debt to the German Bundesbank. The action is estimated to have cost 300 billion French francs, resulting in a debt of 150 billion francs.

Counter-claim

Speculators are the vultures of the fiscal marketplace and as such are useful in their way. The carrion upon which they feed is the determination of certain countries to link the value of their currencies to that of the German mark, for example, at a time when the needs of German economic policy directly contradicted policies appropriate to those other countries and irrespective of the social costs of those policies.

It is not the aim of fund managers or banks to sink currencies or attack central backs, rather it is to take a slim profit from the spread between what a currency can be bought for and the selling price. No single individual or group of individuals is rich enough to alter the flow of money in this market. Strategies are driven by the rate of return. If there is an opportunity it is traded. This is a normal investment decision. Only the level of risk and the timing make it appear speculative.