The Sterling Crisis: Gamblers count proceeds of a one-way bet on currency: The foreign exchange markets
Thursday 17 September 1992
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.
- 1 Man who was struck and killed by lightning in Brecon Beacons 'was carrying a selfie stick'
- 3 Tube strike: This pedestrian-friendly map tells you the time it takes to walk between stations
- 4 Pamplona Running of the Bulls 2015: Three men gored and 10 hospitalised on first day of festival
- 5 Sarah Jessica Parker explains why she is not a feminist: 'It's not just about women now'
Man who was struck and killed by lightning in Brecon Beacons 'was carrying a selfie stick'
Greece debt crisis: Greek future in the euro slips into deeper uncertainty as Alexis Tsipras arrives at emergency talks without a written plan
Man soars over Calgary after tying 110 balloons filled with helium to his lawn chair for PR stunt, gets arrested for mischief
Tube strike: This pedestrian-friendly map tells you the time it takes to walk between stations
Pamplona Running of the Bulls 2015: Three men gored and 10 hospitalised on first day of festival
More Britons believe that multiculturalism makes the country worse - not better, says poll
Osborne to cap family benefits at £23,000 – announced ahead of his post-election Budget
Nathan Collier: Montana man inspired by same-sex marriage ruling requests right to wed two wives
Sickness and disability benefits could be reduced by £30 a week as part of £12bn welfare cuts
Greece debt crisis: Angela Merkel and Francois Hollande issue Athens with 24-hour ultimatum to avoid crashing out of the euro
Greece crisis: Referendum exposes a gaping hole at the heart of the European Union – its lack of genuine legitimacy
£23000 - £27000 per annum: Recruitment Genius: A Business Analyst is required ...
£16000 - £23000 per annum: Recruitment Genius: To succeed, you will need to ha...
£8 per hour: Recruitment Genius: This is an opportunity to join an award winni...
£7 - £9 per hour: Recruitment Genius: Are you outgoing? Do you want to work in...