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.

Start your day with The Independent, sign up for daily news emails
Have you tried new the Independent Digital Edition apps?
ebooks
ebooksAn introduction to the ground rules of British democracy
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

Recruitment Genius: Business Analyst - 12 Month FTC - Entry Level

£23000 - £27000 per annum: Recruitment Genius: A Business Analyst is required ...

Recruitment Genius: Chefs - All Levels

£16000 - £23000 per annum: Recruitment Genius: To succeed, you will need to ha...

Recruitment Genius: Maintenance Engineer

£8 per hour: Recruitment Genius: This is an opportunity to join an award winni...

Recruitment Genius: Telesales Executive & Customer Service - Call Centre Jobs!

£7 - £9 per hour: Recruitment Genius: Are you outgoing? Do you want to work in...

Day In a Page

Isis in Syria: Influential tribal leaders hold secret talks with Western powers and Gulf states over possibility of mobilising against militants

Tribal gathering

Influential clans in Syria have held secret talks with Western powers and Gulf states over the possibility of mobilising against Isis. But they are determined not to be pitted against each other
Gaza, a year on from Operation Protective Edge: A growing population and a compromised and depleted aquifer leaves water in scarce supply for Palestinians

Gaza, a year on from Operation Protective Edge

A growing population and a compromised and depleted aquifer leaves water in scarce supply for Palestinians
Dozens of politicians, bureaucrats and businessmen linked to Indian bribery scandal die mysteriously

Illnesses, car crashes and suicides

Dozens of politicians, bureaucrats and businessmen linked to Indian bribery scandal die mysteriously
Srebrenica 20 years after the genocide: Why the survivors need closure

Bosnia's genocide, 20 years on

No-one is admitting where the bodies are buried - literally and metaphorically
How Comic-Con can make or break a movie: From Batman vs Superman to Star Wars: Episode VII

Power of the geek Gods

Each year at Comic-Con in San Diego, Hollywood bosses nervously present blockbusters to the hallowed crowd. It can make or break a movie
What do strawberries and cream have to do with tennis?

Perfect match

What do strawberries and cream have to do with tennis?
10 best trays

Get carried away with 10 best trays

Serve with ceremony on a tray chic carrier
Wimbledon 2015: Team Murray firing on all cylinders for SW19 title assault

Team Murray firing on all cylinders for title assault

Coaches Amélie Mauresmo and Jonas Bjorkman aiming to make Scot Wimbledon champion again
Wimbledon 2015: Nick Bollettieri - Vasek Pospisil must ignore tiredness and tell himself: I'm in the quarter-final, baby!

Nick Bollettieri's Wimbledon Files

Vasek Pospisil must ignore tiredness and tell himself: I'm in the quarter-final, baby!
Ashes 2015: Angus Fraser's top 10 moments from previous series'

Angus Fraser's top 10 Ashes moments

He played in five series against Australia and covered more as a newspaper correspondent. From Waugh to Warne and Hick to Headley, here are his highlights
Greece debt crisis: EU 'family' needs to forgive rather than punish an impoverished state

EU 'family' needs to forgive rather than punish an impoverished state

An outbreak of malaria in Greece four years ago helps us understand the crisis, says Robert Fisk
Gaza, a year on from Operation Protective Edge: The traumatised kibbutz on Israel's front line, still recovering from last summer's war with Hamas

Gaza, a year on from Operation Protective Edge

The traumatised kibbutz on Israel's front line, still recovering from last summer's war with Hamas
How to survive electrical storms: What are the chances of being hit by lightning?

Heavy weather

What are the chances of being hit by lightning?
World Bodypainting Festival 2015: Bizarre and brilliant photos celebrate 'the body as art'

World Bodypainting Festival 2015

Bizarre and brilliant photos celebrate 'the body as art'
alt-j: A private jet, a Mercury Prize and Latitude headliners

Don't call us nerds

Craig Mclean meets alt-j - the math-folk act who are flying high