http://olesiafx.com/Kathy-Lien-Day-Trading-The-Currency-Market/George-Soros-the-ManWho-Broke-The-Bank-Of-England.html When George Soros placed a $10 billion speculative bet against the U.K.

pound and won, he became universally known as "the man who broke the Bank of England." Whether you love him or hate him, Soros led the charge in one of the most fascinating events in currency trading history. The United Kingdom Joins the Exchange Rate Mechanism In 1979, a Franco-German initiative set up the European Monetary System (EMS) in order to stabilize exchange rates, reduce inflation, and prepare for monetary integration. The Exchange Rate Mechanism (ERM), one of the EMS 's main components, gave each participatory currency a central exchange rate against a basket of currencies, the European Currency Unit (ECU). Participants (initially France, Germany , Italy , the Netherlands , Belgium , Denmark , Ireland , and Luxembourg ) were then required to maintain their exchange rates within a 2.25 percent fluctuation band above or below each bilateral central rate. The ERM was an adjustable-peg system, and nine realignments would occur between 1979 and 1985. While the United Kingdom was not one of the original members, it would eventually join in 1990 at a rate of 2.95 deutsche marks to the pound and with a fluctuation band of +/- 6 percent. Until mid-1992, the ERM appeared to be a success, as a disciplinary effect had reduced inflation throughout Europe under the leadership of the German Bundesbank. The stability wouldn't last, however, as international investors started worrying that the exchange rate values of several currencies within the ERM were inappropriate. Following German reunification in 1989, the nation's government spending surged, forcing the Bundesbank to print more money. This led to higher inflation and left the German central hank with little choice but to increase interest rates. But the rate hike had additional repercussionsbecause it placed upward pressure on the German mark. This forced other central banks to raise their interest rates as well, so as to maintain the pegged currency exchange rates (a direct application of Irving Fishers interest rate parity theory). Realizing that the United Kingdom 's weak economy and high unemployment rate would not permit the British government to maintain this policy for long, George Soros stepped into action.

Soros Bets Against Success of U.K. Involvement in ERM The Quantum hedge fund manager essentially wanted to bet that the pound would depreciate because the United Kingdom would either devalue the pound or leave the ERM. Thanks to the progressive removal of capital controls during the EMS years, international investors at the time had more freedom than ever to take advantage of perceived disequilibriums, so Soros established short positions in pounds and long positions in marks by borrowing pounds and investing in mark-denominated assets. He also made great use of options and futures. In all, his positions accounted for a gargantuan $10 billion. Soros was not the only one: many other investors soon followed suit. Everyone was selling pounds, placing tremendous downward pressure on the currency. At first, the Bank of England tried to defend the pegged rates by buying 15 billion pounds with its large reserve assets, but its sterilized interventions (whereby the monetary base is held constant thanks to open market interventions) were limited in their effectiveness. The pound was trading dangerously close to the lower levels of its fixed band. On September 16, 1992 , a day that would later be known as Black Wednesday, the bank announced a 2 percent rise in interest rates (from 10 percent to 12 percent) in an attempt to boost the pound's appeal. A few hours later, it promised to raise rates again, to 15 percent, but international investors such as Soros could not be swayed, knowing that huge profits were right around the corner. The market believed that the interest rates of 15% were unsustainable, so they kept selling pounds.Traders kept selling pounds in huge volumes, and the Bank of England kept buying them until, finally, at 7:00 p.m. that same day, Chancellor Norman Lamont announced Britain would leave the ERM and that rates would return to their initial level of 10 percent. The chaotic Black Wednesday marked the beginning of a steep depreciation in the pounds effective value. Whether the return to a floating currency was due to the Soros-led attack on the pound or because of simple fundamental analysis is still debated today. What is certain, however is that the pound's depreciation of almost 15 percent against the deutsche mark and 25 percent against the dollar over the next five weeks (a s seen in Figure 2.2 and Figure 2.3) resulted in tremendous profits for Soros and other traders. Within a month, the Quantum Fund rushed in on approximately $2 billion by selling the now more expensive deutsche marks and buying back the

now cheaper pounds. The man who broke the Bank of England showed how central banks can still be vulnerable to speculative attacks.

Figure 2.2 GBP/DEM After Soros

Figure 2.3 GBP/USD After Soros

George Soros (Hungarian: Soros Gyrgy; pronounced /sros/ or /srs/,[2] Hungarian: [oro]; born August 12, 1930, as Schwartz Gyrgy) is a Hungarian-American financier, businessman and notable philanthropist focused on supporting liberal ideals and causes.[3]He became known as "the Man Who Broke the Bank of England" after he made a reported $1 billion during the 1992 Black Wednesday UK currency crises.[4][5] Soros correctly speculated that the British government would have to devalue the pound sterling.[6] Soros is Chairman of the Soros Fund Management. In July 2011, Soros announced that he was returning outside investment money (valued at $1 billion) and will only invest his own $24.5 billion family fortune because of new U.S. Securities and Exchange Commissiondisclosure rules.[7] Soros is also the chairman of the Open Society Institute and a former member of the Board of Directors of the Council on Foreign Relations. He played a significant role in the peaceful transition from communism to capitalism in Hungary (198489)[5] and provided Europe's largest-ever higher education endowment to Central European University in Budapest.[8] Later, the Open Society Institute's programs in Georgia were considered by Russian and Western observers to have been crucial in the success of the Rose Revolution. In the United States, he is known for donating large sums of money in an effort to defeat President George W. Bush's bid for re-election in 2004. In 2010, he donated $1 million in support of Proposition 19, which would have legalized marijuana in the state of California. He

was an initial donor to the Center for American Progress, and he continues to support the organization through the Open Society Foundations. The Open Society Institute has active programs in more than 60 countries around the world with total expenditures currently averaging approximately $600 million a year.[9] In 2003, former Federal Reserve Chairman Paul Volcker wrote in the foreword of Soros' book The Alchemy of Finance: George Soros has made his mark as an enormously successful speculator, wise enough to largely withdraw when still way ahead of the game. The bulk of his enormous winnings is now devoted to encouraging transitional and emerging nations to become 'open societies,' open not only in the sense of freedom of commerce but more important tolerant of new ideas and different modes of thinking and behavior.[10] Currency speculation On September 16, 1992, Black Wednesday, Soros's fund sold short more than $10 billion worth of pounds,[27] profiting from the UK government's reluctance to either raise its interest rates to levels comparable to those of other European Exchange Rate Mechanism countries or to float its currency. Finally, the UK withdrew from the European Exchange Rate Mechanism, devaluing the pound sterling, earning Soros an estimated $1.1 billion. He was dubbed "the man who broke the Bank of England".[32] In 1997, the UK Treasury estimated the cost of Black Wednesday at 3.4 billion. On Monday, October 26, 1992, The Times quoted Soros as saying: "Our total position by Black Wednesday had to be worth almost $10 billion. We planned to sell more than that. In fact, when Norman Lamont said just before the devaluation that he would borrow nearly $15 billion to defend sterling, we were amused because that was about how much we wanted to sell." Stanley Druckenmiller, who traded under Soros, originally saw the weakness in the pound. "Soros' contribution was pushing him to take a gigantic position."[33][34] In 1997, during the Asian financial crisis, the Prime Minister of Malaysia Mahathir bin Mohamad accused Soros of using the wealth under his control to punish the Association of

Southeast Asian Nations (ASEAN) for welcoming Myanmar as a member. Following on a history of antisemitic remarks, Mahathir made specific reference to Soros's Jewish background ("It is a Jew who triggered the currency plunge"[35]) and implied Soros was orchestrating the crash as part of a larger Jewish conspiracy. Nine years later, in 2006, Mahathir met with Soros and afterwards stated that he accepted that Soros had not been responsible for the crisis. [36] In 1998's The Crisis of Global Capitalism: Open Society Endangered Soros explained his role in the crisis as follows: The financial crisis that originated in Thailand in 1997 was particularly unnerving because of its scope and severity.... By the beginning of 1997, it was clear to Soros Fund Management that the discrepancy between the trade account and the capital account was becoming untenable. We sold short the Thai baht and the Malaysian ringgit early in 1997 with maturities ranging from six months to a year. (That is, we entered into contracts to deliver at future dates Thai Baht and Malaysian ringgit that we did not currently hold.) Subsequently Prime Minister Mahathir of Malaysia accused me of causing the crisis, a wholly unfounded accusation. We were not sellers of the currency during or several months before the crisis; on the contrary, we were buyers when the currencies began to decline we were purchasing ringgits to realize the profits on our earlier speculation. (Much too soon, as it turned out. We left most of the potential gain on the table because we were afraid that Mahathir would impose capital controls. He did so, but much later.)[37] The nominal U.S. dollar GDP of the ASEAN fell by $9.2 billion in 1997 and $218.2 billion (31.7%) in 1998. New York Times columnist Paul Krugman is critical of Soros's effect on financial markets."[N]obody who has read a business magazine in the last few years can be unaware that these days there really are investors who not only move money in anticipation of a currency crisis, but actually do their best to trigger that crisis for fun and profit. These new actors on the scene do not yet have a standard name; my proposed term is 'Soroi.'"[38] BLACK WEDNESDAY

This is one of the well-known stories involving Forex Trading. Among the largest profiteers was the legendary George Soros, who made an amazing 1 Billion pounds sterling during this episode. The saga gave him the title of The man who broke the Bank of England. Here is how things played out. Prior to 1990 Britain used the fixed exchange rate system where they pegged the value of the pound sterling. This fixed exchange regime meant below market interest rates and resulted in gradually rising inflation. In 1990 Britain decided to abandon this practice of fixing its currency and adopted policies of the European Exchange Rate Mechanism. (ERM). The European Exchange Rate Mechanism was a build up to a unified currency (i.e the EURO). The Pound Sterling entered the market at 1 Pound: 2.95 Deutshe Mark. This rate was despite that British inflation levels that were three times higher than that of Germany. Forex speculators naturally picked this up, and anticipated an eventual devaluation of the British pound against the Deutshe Mark. During the fortnight leading to the 16th of September 1992 speculators sold billions of Pounds hoping to buy them back at a depreciated rate hence pocket the difference. Among them was George Soros. The British decided to intervene by hiking interests rates to 12 %. Government authorized expenditure of Billions of Pounds to buy back the pounds that were being frantically sold. In effect the government was pumping out massive wealth to speculators. The intervention had little or no effect. During the evening of September 16, 1992 the British government announced its exit from ERM and reverted back to the pegged Pound sterling. Interest rates however remained at 12 %. This episode shows that the Free Market Forces that drive exchange rates are indeed Free. The traders of that time continued relentlessly shorting the Pound depite government measures because they knew that at the end of the day market forces would prevail. Once these forces push

a currency one way it is almost impossible to intervene via central bank mechanisms, government directives or otherwise