A:

In Britain, Black Wednesday (Sept.16, 1992) is known as the day that speculators broke the pound. They didn't actually break it, but they forced the British government to pull it from the European Exchange Rate Mechanism (ERM). Joining the ERM was part of Britain's effort to help the unification of the European economies. However, in the imperialistic style of old, she had tried to stack the deck.

Although it stood apart from European currencies, the British pound had shadowed the German mark in the period leading up to the 1990s. Unfortunately, the desire to "keep up with the Joneses" left Britain with low interest rates and high inflation. Britain entered the ERM with the express desire to keep its currency above 2.7 marks to the pound. This was fundamentally unsound because Britain's inflation rate was many times that of Germany's.

Compounding the underlying problems inherent in the pound's inclusion into the ERM was the economic strain of reunification that Germany found itself under, which put pressure on the mark as the core currency for the ERM. The drive for European unification also hit bumps during the passage of the Maastricht Treaty, which was meant to bring about the euro. Speculators began to eye the ERM and wondered how long fixed exchange rates could fight natural market forces.

Spotting the writing on the wall, Britain upped its interest rates to the teens to attract people to the pound, but speculators, George Soros among them, began heavy shorting of the currency.

The British government gave in and withdrew from the ERM as it became clear that it was losing billions trying to buoy its currency artificially. Although it was a bitter pill to swallow, the pound came back stronger because the excess interest and high inflation were forced out of the British economy following the beating. Soros pocketed $1 billion on the deal and cemented his reputation as the premier currency speculator in the world.

For more on Soros' feat against the British pound, read The Greatest Currency Trades Ever Made and The Greatest Investors: George Soros.

RELATED FAQS
  1. Why is the U.S. dollar shown on the top of some currency pairs and on the bottom ...

    All currencies are traded in pairs. The first currency in the pair is called the base currency while the second is called ... Read Answer >>
  2. How do national interest rates affect a currency's value and exchange rate?

    Generally, higher interest rates increase the value of a country's currency and lower interest rates tend to be unattractive ... Read Answer >>
  3. How often do exchange rates fluctuate?

    Learn how exchange rates fluctuate. Exchange rates float freely against one another, which means they are in constant fluctuation. ... Read Answer >>
  4. How did mercantilism affect the colonies of Great Britain?

    The colonial economy was dominated by mercantilism, where the colonies would supply raw goods. Read on to learn about the ... Read Answer >>
Related Articles
  1. Insights

    Soros Failed to Short Pound for Brexit

    Legendary Investor George Soros Still Profited From Brexit Because of His Bearish Outlook on World Markets
  2. Managing Wealth

    George Soros: The Philosophy Of An Elite Investor

    George Soros spent decades as one of the world's elite investors. He didn't always come out on top, but when he did, it was spectacular.
  3. Investing

    By George: Investing The Soros Way

    Soros turned an original seed funding of $12 million into $20 billion by the first decade of the 21st century. Can regular folks invest like George Soros?
  4. Investing

    Soros Is Trading Again Amidst Global Concerns

    Does Soros sense new opportunities on the horizon?
  5. Insights

    George Soros 13F: Added Comcast, Increased Time Warner In Q3

    The value of billionaire George Soros' portfolio fell during Q3.
  6. Trading

    How Forex Speculators Profited From Famous Currency Meltdowns

    Studying currency meltdowns shows traders how they can avoid big losses (or make big money) when global politics tilt the forex market.
  7. Investing

    Soros Upends Portfolio, Makes Big Bets on Info Tech

    Soros Fund Management upended its portfolio in Q1, with info tech getting the bulk of the attention.
  8. Financial Advisor

    This Is What George Soros' Portfolio Looks Like (SPY, YPF)

    Learn about what George Soros is holding in his portfolio, including his large options position in the S&P 500 and what popular Internet stock he liquidated.
RELATED TERMS
  1. Enterprise Risk Management

    Enterprise Risk Management is a business strategy that identifies ...
  2. George Soros

    George Soros is a famous hedge fund manager who is widely considered ...
  3. European Currency Unit - ECU

    The European Currency Unit was the official monetary unit of ...
  4. GBP

    GBP is the abbreviation for the British pound sterling, the official ...
  5. Fixed Exchange Rate

    A fixed exchange rate is a regime where the official exchange ...
  6. GBP/USD (British Pound/U.S. Dollar)

    The abbreviation for the British pound and U.S. dollar (GBP/USD) ...
Hot Definitions
  1. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  2. Current Assets

    Current assets is a balance sheet account that represents the value of all assets that can reasonably expected to be converted ...
  3. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  4. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  5. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
  6. Depreciation

    Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account ...
Trading Center