The recent slide in the euro is thrusting the actions of currency traders into the spotlight, the last place they like to be. U.S. authorities, for example, are examining whether hedge funds may have worked together to try to drive down the euro's value. In the euro's case, it seems unlikely that the actions of a handful of players are behind its weakness: There are plenty of fundamental reasons for it to fall and the market for the currency is too large to be swayed by a small number of investors.
On the other hand, there's a reason governments often point the finger at "speculators" when currencies are under fire. That's because there are some famous cases where traders identified a currency for demolition and succeeded. One key is to pick a currency with some kind of fixed peg. That forces a government to enter currency markets and defend a particular level, depleting its own cash in the process.
George Soros v. the British pound, 1992
The motivation
The U.K. had pledged to keep the pound within a very narrow range as part of the mechanism that preceded the introduction of the euro. Mr. Soros and others thought that level was far too strong, given the weakness of the British economy.
The trade
Mr. Soros reportedly amassed "short" positions - bets the currency would weaken - worth more than $10-billion (U.S.), selling pounds and buying marks.
The result
Others traders jumped on the bandwagon, generating huge pressure on the pound and forcing the government to buy the currency with its own reserves. On Sept. 16, the U.K. announced it would allow its pound to float freely. The currency then plunged, handing Mr. Soros billions in profits.
Postscript
The spectacular success of the trade continues to haunt Mr. Soros, who was dubbed "the man who broke the Bank of England." His fund was one of those mentioned in the current investigation of the euro. A spokesman denied the fund did anything wrong, adding that it is now "commonplace to direct attention toward George Soros whenever currency markets are in the news."
Traders v. the Thai baht, 1997
The motivation
Thailand had pegged its currency to the U.S. dollar for years, but economic growth was slowing and companies had amassed large debts in foreign currencies, which made the baht look vulnerable. The trade
In May of 1997, traders launched an attack on the Thai currency, selling it against the greenback. The Thai government began buying the baht to prop it up, eventually spending $30-billion (U.S.).
The result
With its reserves dwindling, the Thai government abandoned the peg in July, 1997. The devaluation of the baht set off a chain reaction that eventually enveloped the entire region in an economic crisis. By January, 1998, the baht had lost more than half its value versus the dollar.
Best insult
As other Asian currencies came under pressure in late 1997, then-prime minister Mahathir Mohamad of Malaysia said currency trading was "unnecessary, unproductive and immoral."