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
Life and Style
love + sex A new study has revealed the average size - but does that leave men outside the 'normal' range being thought of as 'abnormal'?
Arts and Entertainment
TV
Voices
The Palace of Westminster is falling down, according to John Bercow
voices..says Matthew Norman
Sport
Steve Bruce and Gus Poyet clash
football
Have you tried new the Independent Digital Edition apps?
ebooks
ebooksA special investigation by Andy McSmith
News
Graham Norton said Irish broadcaster RTE’s decision to settle was ‘moronic’
TV
Arts and Entertainment
Jake and Dinos Chapman were motivated by revenge to make 'Bring me the Head of Franco Toselli! '
arts + ents Shapero Modern Gallery to show explicit Chapman Brothers film
Arts and Entertainment
Kurt Cobain performing for 'MTV Unplugged' in New York, shortly before his death
music Brett Morgen's 'Cobain: Montage of Heck' debunks many of the myths
Life and Style
life
Sport
Brendan Rodgers
football The Liverpool manager will be the first option after Pep Guardiola
News
Amazon misled consumers about subscription fees, the ASA has ruled
news
Arts and Entertainment
Myanna Buring, Julian Rhind-Tutt and Russell Tovey in 'Banished'
TV Jimmy McGovern tackles 18th-century crime and punishment
Arts and Entertainment
Paul Whitehouse as Herbert
arts + ents
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

SThree: Trainee Recuitment Consultant

£18000 - £23000 per annum + OTE: SThree: SThree are a global FTSE 250 business...

Recruitment Genius: Lettings and Sales Negotiator - OTE £46,000

£16000 - £46000 per annum: Recruitment Genius: This is an opportunity to join ...

Recruitment Genius: Home Care Worker - Reading and Surrounding Areas

£9 - £13 per hour: Recruitment Genius: This is a great opportunity to join a s...

Recruitment Genius: Key Sales Account Manager - OTE £35,000

£25000 - £35000 per annum: Recruitment Genius: Have you got a proven track rec...

Day In a Page

Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

Climate change key in Syrian conflict

And it will trigger more war in future
How I outwitted the Gestapo

How I outwitted the Gestapo

My life as a Jew in wartime Berlin
The nation's favourite animal revealed

The nation's favourite animal revealed

Women like cuddly creatures whilst men like creepy-crawlies
Is this the way to get young people to vote?

Getting young people to vote

From #VOTESELFISH to Bite the Ballot
Poldark star Heida Reed: 'I don't think a single bodice gets ripped'

Poldark star Heida Reed

'I don't think a single bodice gets ripped'
The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn