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What causes currency crises?

What causes currency crises?

The phrase "currency crisis" is often put up, and unfortunately it is not always right. However, there is actually called the currency crisis, and in this article I will give you an idea of ??what it actually is.

The currency crisis is essentially a situation in which speculators devalue the currency, leading to a sudden and significant decline. When this happens, macroeconomics feel the effects of this sudden change, and can cause major financial problems. The currency crisis can occur for several reasons, such as decisions taken in monetary policy. Can also be on a political background. One example of a policy that is causing a currency crisis is the recent situation of the Turkish lira crisis, which has lost more than a third of its  in the Turkish central bank. This clearly has far-reaching consequences for the general population. Although this type of situation is extreme, it occurs from time to time.

Analysis of the currency crisis

The currency crisis could develop due to several different factors. Usually it is a kind of political situation, an economic disaster, or even a mistake on the part of the local central bank. In addition, war can also play its part. Regardless of why, the end result is always the same: the currency loses a large amount of value in a very short time. This creates a severe instability in the exchange rate, and inflation of the local population. This means that the same amount of currency buys less than in the past. In this case, if the negative surrounding the currency does not change, they become self-feeding cycle.

Currency Crisis

With this happening, it makes it very difficult for the host economy to finance capital spending. In order to combat this, central banks are raising interest rates to counterbalance the downward pressure placed by speculators on the currency. The theory goes that if interest rates are higher, it will reward traders for keeping that currency, which drives the value higher. To raise interest rates, the central bank sells its foreign exchange reserves, which will reduce money supply in its own country and create capital outflows. Payments received in local currency will also be charged to increase demand for that currency. Unfortunately, many small central banks around the world have learned that supporting their own currency is almost impossible in the long run because of the limited foreign reserves they own. In addition, you also have many economic issues that can come in this scenario.
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