What is Currency Speculation?

Jeremy Laukkonen

Currency speculation is the act of buying and selling the money of various countries in order to take advantage of fluctuating exchange rates. Some speculators make many transactions each day with one or more currency pairs, while others purchase a large amount of one currency and then hold on to it for a longer time. The foreign exchange market (forex) is one method that people commonly use for currency speculation. Forex and other forms of currency speculation became highly viable after the collapse of Bretton Woods, a system that had previously stabilized exchange rates.

The foreign exchange market (forex) is one method that people commonly use for currency speculation.
The foreign exchange market (forex) is one method that people commonly use for currency speculation.

The main purpose of forex is to facilitate business by allowing a company in one country to pay for imported goods with the native currency, though it is widely used for other behaviors such as currency speculation and carry trade. Speculating with forex typically involves the interaction of currency pairs. As the exchange rate of the two currencies fluctuates, a speculator can make money by purchasing one or the other. Some investors specialize in a single currency pair while others will speculate on any currency that shows movement up or down in relative value.

Individuals often engage in currency speculation, though the practice is also common among other financial entities. Banks often trade large amounts of money via forex, while certain hedge funds are notorious for currency speculation. Hedge funds as a whole control vast amounts of equity that can be used to buy and sell currencies with the sole purpose of making money on each transaction.

By taking advantage of already unstable currencies, speculation can sometimes create more instabilities. National banks will sometimes move to stabilize their currency, though it is unclear as to exactly how much of an effect that they can have. Market forces sometimes overwhelm the attempts of a central bank to stabilize its national currency, as the combined strength of worldwide forex investors often outstrips the purchasing power of national banks.

There have been various calls for taxation or other methods to stabilize currency speculation. Some people have called for a new Bretton Woods system that would stabilize national currencies and exchange rates. Others have suggested a tax that would be charged on each and every forex transaction to discourage the speculative buying and selling of money. A great amount of discussion has taken place regarding how much such a tax would be and how many nations would need to enforce it, though some have suggested it might actually encourage more speculation with even larger amounts of money.

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