In a fixed exchange rate system,speculation regarding an expected revaluation or devaluation of a currency makes is more difficult to maintain the existing exchange rate.

Question

Quizplus · Accepted Answer

Speculation about a currency's future value can lead to changes in supply and demand for that currency, making it more difficult to maintain a fixed exchange rate. If there is a high demand for a currency that is expected to appreciate in value, for example, the central bank may have to buy up that currency to keep it from becoming too expensive relative to the other currency in the fixed exchange rate. If there is a high supply of a currency that is expected to depreciate, the central bank may have to sell off that currency to keep its value from dropping too much. Either way, this activity can place pressure on the fixed exchange rate and make it harder to sustain.

In a Fixed Exchange Rate System,speculation Regarding an Expected Revaluation