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Currency speculators: Some of world’s biggest gamblers

October 27, 1997 GMT

NEW YORK (AP) _ Often blamed as the villains when a nation’s financial markets are in turmoil, currency speculators may be some of the world’s biggest gamblers.

They stand to make millions, even billions, of dollars if they bet correctly that a nation’s currency will be devalued in the weeks or months ahead. If they’re wrong, the losses can be just as huge.

Currency speculators have been in the news in recent months because of the wave of attacks on Asian currencies that began last summer against the Thai baht. It swept through Southeast Asia, hitting the Malaysian ringgit, Indonesian rupiah and Philippine peso.

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Now, the target is the Hong Kong dollar, which analysts had thought would be safe from speculative fury.

What the speculators are betting is that the territory will be forced to cut the Hong Kong dollar’s link to the U.S. dollar, thereby reducing the value of the territory’s money vs. the greenback. Hong Kong authorities are trying to prove the speculators wrong, insisting they intend to keep the link to the U.S. dollar.

How does this work?

A currency speculator is basically someone who bets on changes in a nation’s money.

If, for example, a speculator decided last spring that the Thai baht was prime for a devaluation, he or she would have bought a futures contract betting the value of the baht would be lower in a month or two. Futures contracts give the buyer the right to buy or sell goods, stocks or currency on a future date at a specific price.

When Thailand did in fact devalue the baht in early July, anyone speculating on a lower baht at that time would have made money.

What might prompt a speculator to bet against a currency?

Currency speculators closely monitor economic data and trends for different countries. ``Once things start to look dicey, they will start to make these kinds of bets against a currency,″ said Nariman Behravesh, chief international economist at Standard & Poor’s DRI in Lexington, Mass.

In the case of Thailand, analysts say, the nation was running a large trade deficit, the currency was overvalued, and a speculative boom in real estate had driven prices sky high. Some saw those as signs the nation’s once high-flying economy was in for a letdown.

Once the baht was devalued, speculators shifted their focus to neighboring currencies, spotting weaknesses in their economies and betting the value of their currencies, too, would be trimmed.

Behravesh said speculators now have turned their attention to Hong Kong because they believe the territory will be affected by its neighbors’ woes. In particular, the lower currencies have made those countries more competitive than Hong Kong on the world market. With weaker currencies, their goods are cheaper and more attractive to foreign buyers.

``What the speculators are saying is `How much longer can Hong Kong hang tough regarding its fixed exchange rate with the dollar,‴ said Behravesh. ``It’s a legitimate question.″

Currency speculators, most notably American billionaire George Soros, have been portrayed by some as the scourge of the investment world. Malaysian Prime Minister Mahathir Mohamad has blamed Soros and other Western investors for causing the region’s crisis to enrich themselves.

Analysts, however, say speculators and the hedge funds they often work for serve a useful function in a free-market system.

Currency speculation is ``perfectly appropriate in freely functioning financial markets,″ said Allen Sinai, chief global economist at Primark Decision Economics. ``It is not only appropriate but often necessary. It (serves) as a discipline on governments ... It can prevent things from going awry.″

Soros, who gained international attention when he bet _ correctly _ against the British pound in 1992, calls currency speculation ``a necessary evil.″

``My defense is that I operate within the rules,″ he said in a 1995 book ``Soros on Soros.″ ``If there is a breakdown in the rules, that is not my fault as a lawful participant but the fault of those who set the rules.″

``When speculators profit,″ he said, ``the authorities have failed in some way or another.″