A fixed exchange rate system encourages speculators to attack weaker currencies.

Question

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In a fixed exchange rate system, weaker currencies are more vulnerable to speculative attacks as they cannot adjust their exchange rate to market forces. Speculators take advantage of this situation by selling the weaker currency in large volumes, which puts pressure on the central bank to defend the fixed exchange rate. The central bank may have to use its foreign reserves to buy its own currency, which can lead to a depletion of reserves and ultimately to a devaluation of the currency.

A Fixed Exchange Rate System Encourages Speculators to Attack Weaker