Currency Crisis
AdvancedA currency crisis is a sudden, sharp fall in the value of a country's currency, often accompanied by speculative attacks, loss of foreign reserves and economic disruption.
Currency crises often occur in countries with fixed or pegged exchange rates. If investors believe a peg cannot be maintained, perhaps because of large trade deficits, high debt in foreign currencies or falling reserves, they sell the currency. The central bank uses its reserves to defend the peg, but if reserves run low, it may be forced to devalue or let the currency float.
Well-known examples include the European exchange rate crisis of 1992, when the United Kingdom left the European Exchange Rate Mechanism, the Mexican peso crisis of 1994 and the Asian financial crisis of 1997, which began in Thailand and spread across the region.
For example, a country whose companies have borrowed heavily in US dollars can be badly hurt if its currency collapses, because their debts become much more expensive in local terms.
Currency crises can lead to high inflation, banking problems, recessions and the need for international assistance, such as loans from the International Monetary Fund.
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