The relativism between the fundamentals of speculative attack on a currency at a consistent state of the fixed exchange rate and the macroeconomic aspects remains fundamental. However, reality exists between these relationships but takes the passive activity of the economic threshold to explain the same influence. The exchange rate forms a benchmark in every activity to define the state of economic activity.
However, the state of this exchange rate is a participant contributor towards the stability of the economy. The economic activity operates pursuant to the economic variables to determine the nature and the state of the macroeconomic situation. However, every choice in the exchange rate can determine the state with which the institutions operating within the economic authorities can drive stability.
Since the volatility of the exchange rate does not necessarily imply instability in the economic activity, the choice of the regime for exchange rate plays a predominant role in define the level with which the state of the economy is to be persuaded. However, the assumption in this paper would be that the choice of fixed exchange rate remains compatible with the state of the macroeconomic activity. Summarily, therefore, an equilibrium of stability and agreement will be assumed to remain.
Generally, with the active role of choosing the state of the exchange rate by a country, the result of its economic outlay is either bad or worse. However, consistency between the macroeconomic structures and the fixed exchange rate is part of the response activity that develops from such an activity. The strength of the monetary policy between both the demand and the supply of money is an important factor in determining the state of the economy. The exchange rates are defined and structured in terms of the monitoring policies within the economy. Elsewhere, the macroeconomic variables are constituent components of the economic activity where the level of employment, investment, and another basic result variable would be defined. (Kline, 2005, p.1)
However, at every verge of this consistency between the macroeconomic structure and the fixed exchange, rate, speculative attacks may seldom arise. The speculative attack is a case within both the foreign and the domestic investors’ choice to sell their assets of domestic currency nature. This is more vulnerable to countries utilizing fixed exchange rates. However, the same is less vulnerable to states adopting the floating exchange rate. The rise of speculative attacks is a close ally of the level of reserves held. Either, the nature of the fixed exchange rate requires a high level of reserves for the holding. At every instance of a speculative attack, any choice of maintaining the fixed exchange rate serves to even provide chances for economic depression or even collapse in the financial systems.
The rise in this attack under consistent levels of both the macroeconomic system and the fixed exchange rates may be of critical analysis. At one point, the stability between the two tries to state the existing harmony in any external influence between the macroeconomic variables and the fixed exchange rate. Though the macroeconomic variable would be found operating at an optimal scale, there is the will of the sale of the currency assets by the foreign investors and also the domestic investors.
This is usually a liquidation process in the currency assets which are primarily owned by these investors. The basic result of a speculative attack is the depression in the economic activity or a decline in the success of the financial markets. Generally, the basic attribute behind the speculative attack is to provide structures that help to improve the standards of price for the monetary assets held by the investors. (Dallas, Stockman, 1993, p.1) It is aimed at changing the directional position of the currently existing price level to even seek its improvement. It will rely fully upon the market which is influenced through a coordinated approach with which the market can streamline the existing level of profits.
At every moment of a speculative attack, the central bank is made to use its monetary tools for affecting standards with which support for an adequate economic state can be provided for. This would involve the use of both directed and indirect transactions of increasing the currency supply or the interest rate.
The basic ingredient behind speculative attack despite consistency in the macroeconomic variables and the fixed exchange rate is the ability in the flow of the capital between different markets. The accessibility within such financial markets of international capacity provides coherent and legitimate standards with which capital outflow can be conducted from one country to another.
The epoch of integration in markets within the international portfolio has a lot in regard to financial and currency crises. Responsiveness to the changes and crises within the international financial market is the main contributor towards exemplary standards of speculative attacks. From any financial crisis, various issues rise up such as the state of the speculative attack, the nature and the type of defense policies, the vulnerability with which the exchange rates are flexible above that of the support by the international financial system. Within the international market portfolio, there have been structural changes that have rationed for the accessibility improvement of the market systems of international finances. (Streissler, 2002, p.58)
Accessibility to such financial markets has to lead to the accessibility by the foreign investors which is the basic contribution of the speculating attacks. Various changes in the investment structures within the international portfolio seek to provide authentic standards for the transfer of such assets to these markets. The emergency of the international market securities has been an echo of the changes in the investment institutions and the relative interest of foreign investor involvement in the international market. Consequently, investors are able to take the high risks involved in the international market investment than to keep low investment benefits of fixed exchange rate countries. (Boyer, Young, 2005, p.1)
However, the mobility in capital transfers from one country to another has raised the activity of the central bank. This has been basically through structural changes in the foreign exchange systems above that of the control in the basic supply on domestic currency for sellers of a short term(s). Notably, speculation attack is more vulnerable to the short terms currency sales contracts. The investor can sell the currency and still maintain the required balance between the exchange rate systems.
The birth of the speculative attack is dated back to many years of various economic epochs since the 1920s. The general characteristic of fixed exchange rates with the factor of mobility in capital outflow has often lead to the factor of a speculative attack. With unfavorable conditions in the profitability of the financial investments, investors are highly volatile to seek conditions that provide the most stable and profitable economic profit situation.
Flexibility in the exchange rate is the basic condition that can ease the abrupt nature of capital outflow since investments can adjust with the occasionally changing state of the exchange rate. Management in the exchange rate is therefore the basic tool that is used by most governments to maintain stability in the investment prices of the domestic investment. This is also a basic feature for maintaining highly competitive positions at the external diameters.
However, the subject of the macroeconomic tools should never be overlooked at every attempt of ensuring the financial stability of the domestic markets. In the short-run period of economic activity, the fixed exchange rate is in harmony with the macroeconomic situation. However, the state of this balance may be destabilized with the external shocks of the better conditions within the foreign markets. Importance should therefore be attached to the standards with which the macroeconomic activity should be consistent with the state of the exchange rate. The basic provider of speculative attacks is the various market inconsistencies above the inequalities borne within the financial systems. (Stein, Allen, 1997, p.79)
By the central bank, the prevention of a continued influence of the attack is through strategies and interventions which act on restructuring the foreign exchange systems. The forward market intervention is ensured through a correspondence scenario with which it tries an increased supply of its base money through its purchase of many government securities. However, such forward intervention is not aimed at reducing the base of the monetary level.
Rather, this will involve and affect action till the maturity of the forward contract. Speculative attack refuge can be sought through an establishment of the position which provides net advantages within a short period in the change of the particular domestic currency. However, in most economies, the sterilized intervention has seemed to be failing with a continued activity of capital outflows. The next impact has been an allowance of short-term rise in the interest rates which is a tool aimed at tightening the liquidity conditions within these financial markets.
Therefore, these conditions lead to a higher cost for the operators to be at an advantage for the next position in the short run, which would initiate them for a higher domestic currency borrowing. The next consequence is a fast increase in a market interest rate at such a short term period which will then be quickly transmitted within the economy. However, higher rates may not extend within such an economy for a long period if the same economy is compounded by an inadequate financial system. (Jofnson, Turner, 2003, p.107)
On the verge of the residents been faced with rigidities of high-interest rates in the short run, the domestic currency market may then “split” through a request of a stoppage in the foreign speculators’ lending by the financial institutions within the domestic economy. However, the exclusion is made for trade flows, equity investments, and foreign investment. For such stoppages restrictions, speculators will then be unable to get credit from the domestic financial authorities. Either, the demand for domestic credit in the non-speculative form will be suitably met for using the existing rates within the normal market conditions. (Bierman, 1998, p.1)
Generally, the main impact providing conditions for the speculative attack is the emergence of integration of capital markets on the financial system of the global portfolio. Such integrated markets are determined by the divergence in the macroeconomic variable and conditions which shapes the nature of capital inflows as well as outflows (importing and exporting). Either, the strength in the stability of these capital exchange conditions is a consistent factor of the political structures and the state of economic developments. Accessibility in the market is determined by the threshold of consistency in the macroeconomic stability, financial outlay, and other policies allied to the structural system of the economic condition. (Dickson, Allan, 2002, p. 81)
Though adequate conditions and desirable terms will be a constituent subject in the state of economic stability, a threshold of speculative attack may ransom such stabilized economic conditions. This is however vulnerable for those economies compounded by various structural weaknesses as well as inconsistencies in its policies. The speculative pressure of the short-term effect can however be strengthened by capital controls of a selective nature whose warranty is valid as long as the attack is not of a fundamental capacity. However, the economic activities to deter the activities of speculative attack will affect the stability into the state of finance and the normal trade relations.
The growing nature and sophistication of the financial markets result in great active participation of the policy and administrative controls. However, the basics of these controls are basically aimed at reducing the ease with which the investors can have accessibility to external investment funds at normal trading periods. Elsewhere, these controls are usually expensive and costly when then disruptive conditions create inequalities in the market finance position. (Dunninq, 1999, p.65)
Basically, to an expanded portfolio, the relationship between the speculative attacks at an existing state of consistency between the fixed market interest rate and the stability of the macroeconomic parameters is an important aspect to be considered. At one point, many economies usually use a fixed interest rate to achieve some economic interests and bargains. Generally, such fixed interest is a basic tool for economies vulnerable to inflation and deflation condition.
However, a fixed exchange rate will create conditions with which the economic aspects interact with one another to provide economic efficiencies and stabilities. Volatility in the floating exchange rate is highly effective to the instability state of the market condition. Within the domestic market, therefore, a fixed exchange rate would provide conditions with which the basic macroeconomic factors and tools work cordially with one another.
The floating exchange rate is a basic contribution of conditions that lead to high inflations and at other times high deflations. Stability in the domestic economy provided by the fixed exchange rate is important for every pursuit of providing stability and consistency in the macroeconomic variables. However, the aspect of integrations and mobility into the international markets is not defined by the standards of stability to the fixed exchange rates. A fixed exchange rate in one country does not mean optimal benefit in financial investment in the international market compounded by the mobility of investment transfers.
Capital outflows have been a major issue affecting the broad global family. Capital outflows have been and will still continue to be at the markets within the international arena. The inflows and the outflows are relative to the desire of seeking various economic advantages (profitable investing) in the foreign countries compared to the level of benefit within the domestic country. The international trade laws and regulations however according to various requirements which provide the simplicity of entering into such markets.
The international business exchange has continued to been developed in this environment of highly integrated business relations and capital mobility from one state economy to another. The same subject hits the domestic economy with which the capital outflow is derived from with various structural consequences which even determine their contexts in terms of economic vulnerability. (Macdonald, 1993, p.77)
Capital outflows lead to a loss in the process for domestic assets. Countries usually adopt measures for strengthening the financial markets and reduce the volatility rate in their assets. Structural activities are basically aimed at reducing the risks involved by their substantial asset transfers. Therefore, at a shorthand analysis, the concept of speculative attack versus the consistency in the macroeconomic level and the state of the fixed exchange rate is valid.
This is a constituent subject of the state in the relationship between the international market integration and the mobility of capital inflows and also outflows across various state borders. Since investors are taken as been rational with they aimed to increase the level of revenue, they will join investment lines that bring the greatest investment benefits to them. The speculative attack is a substantial method of seeking an increase in the interest rest at the domestic economy in the short run above seeking trade benefits from the foreign investment in foreign countries in the long run.
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