Currency Crisis

Currency Crisis

There are in total 6 types of financial crisis namely: 1) Balance-of-payment crisis, 2) Currency Crisis, 3) Banking Crisis, 4) Twin Crisis, 5) Sovereign Debt Crisis and 6) Sudden Stops. Currency Crisis is one of the 6 crisis and is started by speculative attacks on the currency. This ultimately creates a loss in revenues and currency depreciation. It occurs when the value of a currency changes quickly, undermining its ability to serve as a medium of exchange or a store of value. Currency crises usually affect fixed exchange rate regimes, rather than floating regimes.

A currency crisis is a type of financial crisis, and is often associated with a real economic crisis. Currency crises can be especially destructive to small open economies or bigger, but not sufficiently stable ones. Governments often take on the role of fending off such attacks by satisfying the excess demand for a given currency using the country's own currency reserves or its foreign reserves (usually in the United States dollar, Euro or Pound sterling). Currency crises have large, measurable costs on an economy, but the ability to predict the timing and magnitude of crises is limited by theoretical understanding of the complex interactions between macroeconomic fundamentals, investor expectations, and government policy.

Recessions attributed to currency crises include the 1994 economic crisis in Mexico, 1997 Asian Financial Crisis, 1998 Russian financial crisis, and the Argentine economic crisis (1999-2002).