The Sterling Crisis: Gamblers count proceeds of a one-way bet on currency: The foreign exchange markets

IT IS the forces of speculation, not commerce, that dominate the foreign exchange markets.

Whether American, Japanese, German, Swiss or British, the pressure they can exert on a currency snowballs quickly into an irresistible force if the markets become convinced of the direction a currency is taking and know that a profit is certain.

It was all very different at the time of Britain's last formal devaluation in 1967.

Then, it was the reactions of exporters and importers which caused a currency crisis. As one, they decided to sell sterling.

Although there were speculators who dealt only for profit in those days - the infamous 'gnomes of Zurich' who were castigated by the late Lord George Brown - they did not always dominate the markets.

The market today is enormous. The most recent survey by the Bank of England put average daily turnover in London in 1989 at dollars 187bn ( pounds 100bn) - on paper, one-fifth the size of the British economy.

Of this, dollars 56bn was trading in sterling against dollars or German marks.

Furthermore, the bulk of the business was done between one bank dealing desk and another. The survey found 85 per cent of the turnover represented professional dealings between banks.

Only 15 per cent was linked to customers' business transactions - the export of a car, of a shipment of oil or an insurance contract.

That balance gives the banks enormous influence on foreign exchange trading.

Indeed, a key part of the business of banks and other professional investors is to make money from their dealings in the markets.

So senior managers will be demanding explanations if their traders do not make a decent profit from a sterling devaluation.

At the moment, some are doing the same as their commercial customers, adjusting their sterling holdings to reduce their risks. But others are single-mindedly chasing profit.

So who are the speculators? According to Derek Wanless, chief executive of National Westminster Bank, they are 'anybody like a bank or an investment house which has access to large amounts of money, wants to play the markets and sees something which is a one-way bet'.

Last week, the speculators sold the lira in the belief that it would probably be devalued.

They made a huge profit at the expense partly of the German Bundesbank, which spent DM24bn ( pounds 8.6bn) buying lira to support the Italian currency up to the weekend, when it was devalued by 7 per cent.

This week, those dealers have seen the same easy profit in sterling.

United States investment banks based in London are said to have been particularly aggressive in chasing a profit this week at the expense of sterling, having become convinced on Monday that it would be devalued soon.

But banks from every major financial centre are likely to be playing a role, as are professional investment institutions such as pension and insurance funds.

Even at substantial interest rates, it is now hard to find a buyer for pounds. It would take six months or a year to recoup as much in interest payments as an investor could lose in a few days if there was a devaluation.

News
A 1930 image of the Karl Albrecht Spiritousen and Lebensmittel shop, Essen. The shop was opened by Karl and Theo Albrecht’s mother; the brothers later founded Aldi
people
Arts and Entertainment
Standing the test of time: Michael J Fox and Christopher Lloyd in 'Back to the Future'
filmA cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
Arts and Entertainment
Flora Spencer-Longhurst as Lavinia, William Houston as Titus Andronicus and Dyfan Dwyfor as Lucius
theatreThe Shakespeare play that proved too much for more than 100 people
News
exclusivePunk icon Viv Albertine on Sid Vicious, complacent white men, and why free love led to rape
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Arts and Entertainment
Stir crazy: Noel Fielding in 'Luxury Comedy 2: Tales from Painted Hawaii'
comedyAs ‘Luxury Comedy’ returns, Noel Fielding on why mainstream success scares him and what the future holds for 'The Boosh'
Life and Style
Flow chart: Karl Landsteiner discovered blood types in 1900, yet scientists have still not come up with an explanation for their existence
lifeAll of us have one. Yet even now, it’s a matter of debate what they’re for
Arts and Entertainment
'Weird Al' Yankovic, or Alfred Matthew, at the 2014 Los Angeles Film Festival Screening of
musicHis latest video is an ode to good grammar. But what do our experts think he’s missed out?
Sport
New Real Madrid signing James Rodríguez with club president Florentino Perez
sportColombian World Cup star completes £63m move to Spain
Travel
Hotel Tour d’Auvergne in Paris launches pay-what-you-want
travelIt seems fraught with financial risk, but the policy has its benefits
Arts and Entertainment
booksThe best children's books for this summer
Life and Style
News to me: family events were recorded in the personal columns
techFamily events used to be marked in the personal columns. But now Facebook has usurped that
Independent
Travel Shop
the manor
Up to 70% off luxury travel
on city breaks Find out more
santorini
Up to 70% off luxury travel
on chic beach resorts Find out more
sardina foodie
Up to 70% off luxury travel
on country retreats Find out more
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Sustainability Manager

Competitive: The Green Recruitment Company: Job Title: Scheme Manager (BREEAM)...

Graduate Sustainability Professional

Flexible, depending on experience: The Green Recruitment Company: Job Title: T...

Programme Director - Conduct Risk - London

£850 - £950 per day: Orgtel: Programme Director - Conduct Risk - Banking - £85...

Project Coordinator/Order Entry, SC Clear

£100 - £110 per day: Orgtel: Project Coordinator/Order Entry Hampshire

Day In a Page

Noel Fielding's 'Luxury Comedy': A land of the outright bizarre

Noel Fielding's 'Luxury Comedy'

A land of the outright bizarre
What are the worst 'Word Crimes'?

What are the worst 'Word Crimes'?

‘Weird Al’ Yankovic's latest video is an ode to good grammar. But what do The Independent’s experts think he’s missed out?
Can Secret Cinema sell 80,000 'Back to the Future' tickets?

The worst kept secret in cinema

A cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
Facebook: The new hatched, matched and dispatched

The new hatched, matched and dispatched

Family events used to be marked in the personal columns. But now Facebook has usurped the ‘Births, Deaths and Marriages’ announcements
Why do we have blood types?

Are you my type?

All of us have one but probably never wondered why. Yet even now, a century after blood types were discovered, it’s a matter of debate what they’re for
Honesty box hotels: You decide how much you pay

Honesty box hotels

Five hotels in Paris now allow guests to pay only what they think their stay was worth. It seems fraught with financial risk, but the honesty policy has its benefit
Commonwealth Games 2014: Why weight of pressure rests easy on Michael Jamieson’s shoulders

Michael Jamieson: Why weight of pressure rests easy on his shoulders

The Scottish swimmer is ready for ‘the biggest race of my life’ at the Commonwealth Games
Some are reformed drug addicts. Some are single mums. All are on benefits. But now these so-called 'scroungers’ are fighting back

The 'scroungers’ fight back

The welfare claimants battling to alter stereotypes
Amazing video shows Nasa 'flame extinguishment experiment' in action

Fireballs in space

Amazing video shows Nasa's 'flame extinguishment experiment' in action
A Bible for billionaires

A Bible for billionaires

Find out why America's richest men are reading John Brookes
Paranoid parenting is on the rise - and our children are suffering because of it

Paranoid parenting is on the rise

And our children are suffering because of it
For sale: Island where the Magna Carta was sealed

Magna Carta Island goes on sale

Yours for a cool £4m
Phone hacking scandal special report: The slide into crime at the 'News of the World'

The hacker's tale: the slide into crime at the 'News of the World'

Glenn Mulcaire was jailed for six months for intercepting phone messages. James Hanning tells his story in a new book. This is an extract
We flinch, but there are degrees of paedophilia

We flinch, but there are degrees of paedophilia

Child abusers are not all the same, yet the idea of treating them differently in relation to the severity of their crimes has somehow become controversial
The truth about conspiracy theories is that some require considering

The truth about conspiracy theories is that some require considering

For instance, did Isis kill the Israeli teenagers to trigger a war, asks Patrick Cockburn