The increasing sophistication of foreign exchange markets offers investors a wide range of liquid assets. In normal times, this enables participants to manage their risks and lower their costs of transacting, and is therefore conducive to a more efficient allocation of funds in the world economy. But these same features have also expanded the range of opportunities available to speculators who believe that a currency’s sudden depreciation is impending, and have increased the private sector’s ability to marshall large resources on very short notice. Of course, during a foreign exchange crisis, when most market participants become convinced—rightly or wrongly—that a large change in the exchange rate could well be in the offing, the line between speculation and hedging becomes rather blurred.
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