Chapter 9. Foreign Exchange

“Today has been an extremely difficult and turbulent day.”

British Chancellor Norman Lamont, Wednesday, September 16, 1992

Foreign exchange is supposed to be a series of zero-sum games that creates no value. But a series of currency coups in the 1990s prompted investors to treat it as its own asset class. Stock and bond investors played the currency markets and exchange rates started to synchronize with stock markets.

As the City of London started trading on Wednesday, September 16, 1992, it was hit by dramatic news. The Bank of England, not then independent of the government, had raised its base rate by 2 percentage points, from 10 percent to 12 percent. It set in motion a day that proved beyond doubt that markets, ...

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