The foreign exchange (forex) market is the largest market in the world because currency is changing hands whenever goods and services are traded between nations. The sheer size of the transactions going on between nations provides arbitrage opportunities for speculators, because the currency values fluctuate by the minute. Usually these speculators make many trades for small profits, but sometimes a big position is taken up for a huge profit or, when things go wrong, a huge loss. In this article, we'll look at the greatest currency trades ever made.

Currency Wars: Three of the Biggest Currency Raids in History
The Currency Raids of George Soros and Andrew Krieger

In 1987, Andy Krieger, a 32-year-old currency trader at Bankers Trust, was carefully watching the currencies that were rallying against the dollar following the Black Monday crash. As investors and companies rushed out of the American dollar and into other currencies that had suffered less damage in the market crash, there were bound to be some currencies that would become fundamentally overvalued, creating a good opportunity for arbitrage. The currency Krieger targeted was the New Zealand dollar, also known as the kiwi.

Using the relatively new techniques afforded by options, Krieger took up a short position against the kiwi worth hundreds of millions of dollars. In fact, his sell orders were said to exceed the money supply of New Zealand. The selling pressure combined with the lack of currency in circulation caused the kiwi to drop sharply. It yo-yoed between a 3 and 5% loss while Krieger made millions for his employers.
One part of the legend recounts a worried New Zealand government official calling up Krieger's bosses and threatening Bankers Trust to try to get Krieger out of the kiwi. Krieger later left Bankers Trust to go work for George Soros.  

Throughout history there have been raids on financial markets.  Sometimes the raids are malicious – an attempt to corner a market or push the price to an artificially low or high price.  In other situations a raid is simply taking a huge calculated bet on what the trader sees as an inevitable outcome.  The size of the bet has the added effect of often forcing the hands of other traders and politicians to see the error in the ways, thus moving the currency in the raiders favor.  Such raids are a statement by the speculator about policy, regulations, manipulation or the current unsustainable price of a currency.
Two traders took huge positions in the Pound and Kiwi which ultimately resulted in sharp declines and huge profits from the respective currency meltdowns.  The currency raids in these instances were not necessarily malicious (although some may view them as such), but the huge positions did cause the currencies to decline much quicker than they may have otherwise.



Currency Raids – $300 million Kiwi Currency Raid'
It is autumn, 1987 and Andrew Krieger, a trader at Bankers Trust, is watching the New Zealand dollar (NZD) in the aftermath of the 1987 stock market crash.  Currencies such as the NZD (also called the “Kiwi”) are being bid up by traders fearful of holding US dollars.  This leads to a short-term overvaluation of many currencies relative to the USD, but Krieger focused on the Kiwi.
New Zealand has a fairly small economy, and using options Krieger is able to ultimately short the entire money supply of New Zealand (according his book The Money Bazaar).  This would have been impossible if he only used the cash market.
Other traders and even the New Zealand government get involved.  The government asks Krieger to stop the raid, but ultimately the market agrees with Krieger.   The Kiwi sells-off 5% in a single day, with intra-day fluctuations up to 10% according to some sources.  Much of the decline is pinned on Krieger selling massive amounts of Kiwi dollars, yet it is also other traders acting on the information which ultimately leads to Krieger being exit his positions with a profit.
The estimated profit to Bankers Trust was $300 million.  Of which Krieger got a $3 million bonus.  This “tiny” bonus on such a well executed trade disgusted Krieger and ultimately he left Bankers Trust, going to work for George Soros in 1988.
In 1988 Bankers Trust admitted that profits from their options trading activity was overstated by $80 million in Q4 of 1987.  Therefore the profits made specifically by Krieger are drawn into question, as the many of the options that were revalued involved Kiwi dollars.  Such options were fairly new, and it is possible that Krieger was much of the market in such instruments at the time, making the options hard to value.
Either way, Krieger’s position is estimated to have been $700 million to $1 billion, with profits in the range of $220 (lowest possible gain) to $300 million.
Currency Raids – Conclusion
In both these cases, Soros and Krieger made massive bets that the rates in the GBP and NZD were unsustainably high.  Whether the traders caused the decline is ultimately questionable, but there is no doubt that the large positions frightened the market in the speculator’s direction and made the market realize these currencies were overvalued.
In the case of Soros, he saw an economic and political situation which could not sustain a high GBP price.  Krieger shorted massive amounts of the Kiwi, thinking it was artificially high after the 1987 stock market panic.  Both traders capitalized on what they viewed as an overpriced currency, and very effectively helped to bring the currency back in line with what they believed to be a more fair value.



Stanley Druckenmiller Bets on the Mark - TwiceStanley Druckenmiller made millions by making two long bets in the same currency while working as a trader for George Soros' Quantum Fund.

Druckenmiller's first bet came when the Berlin Wall fell. The perceived difficulties of reunification between East and West Germany had depressed the German mark to a level that Druckenmiller thought extreme. He initially put a multimillion-dollar bet on a future rally until Soros told him to increase his purchase to 2 billion German marks. Things played out according to plan and the long position came to be worth millions of dollars, helping to push the returns of the Quantum Fund over 60%.
Possibly due to the success of his first bet, Druckenmiller also made the German mark an integral part of the greatest currency trade in history. A few years later, while Soros was busy breaking the Bank of England, Druckenmiller was going long in the mark on the assumption that the fallout from his boss' bet would drop the British pound against the mark. Druckenmiller was confident that he and Soros were right and showed this by buying British stocks. He believed that Britain would have to slash lending rates, thus stimulating business, and that the cheaper pound would actually mean more exports compared to European rivals. Following this same thinking, Druckenmiller bought German bonds on the expectation that investors would move to bonds as German stocks showed less growth than the British. It was a very complete trade that added considerably to the profits of Soros' main bet against the pound.

George Soros Vs. the British PoundThe British pound shadowed the German mark leading up to the 1990s even though the two countries were very different economically. Germany was the stronger country despite lingering difficulties from reunification, but Britain wanted to keep the value of the pound above 2.7 marks. Attempts to keep to this standard left Britain with high interest rates and equally high inflation, but it demanded a fixed rate of 2.7 marks to a pound as a condition of entering the European Exchange Rate Mechanism (ERM).

Many speculators, George Soros chief among them, wondered how long fixed exchange rates could fight market forces, and they began to take up short positions against the pound. Soros borrowed heavily to bet more on a drop in the pound. Britain raised its interest rates to double digits to try to attract investors. The government was hoping to alleviate the selling pressure by creating more buying pressure.

Paying out interest costs money, however, and the British government realized that it would lose billions trying to artificially prop up the pound. It withdrew from the ERM and the value of the pound plummeted against the mark. Soros made at least $1 billion off this one trade. For the British government's part, the devaluation of the pound actually helped, as it forced the excess interest and inflation out of the economy, making it an ideal environment for businesses.



Currency Raids – George Soros and the $1 billion Profit
Leading up to Black Wednesday on September 16, 1992 when the British government was forced out of the European Exchange Rate Mechanism (ERM), there were many issues facing Britain.
The ERM required that Britain maintain the currency from fluctuating more than 6% against other currencies within the ERM.  The problem was that at the time Britain had an inflation rate three times that of Germany.  The ERM was also under attack itself as member countries felt the model would not work in the face of real-world issues. Britain falsely assumed that by joining the ERM inflation would be curbed – after all, Germany was part of the ERM and it had a very low inflation rate at the time.

George Soros saw through this tactic.   He correctly calculated that joining the ERM would do nothing to help the Pound, but would likely only hold the currency at artificially high levels.  With nothing substantial to hold the currency up it would eventually come crashing down as Britain was forced to realize the ERM could not save it from declining.

George Soros and other speculators shorted the Pound leading up to September 16, expecting that policy makers would be unable to support the currency above the fluctuation band it was mandated to adhere to.  In return, the Treasury tried to offset the speculators selling by buying Pounds.  This temporarily allowed the Pound to stay within “the band,” but ultimately even the Treasury couldn’t support the currency.  The Pound began to fall and British government got desperate.

On September 16, the government raised interest rates from 10% to 12% in attempt to bring buying support into the GBP.  The plan didn’t work and the Pound continued to fall. The massive interest rate hike was seen as a desperate attempt, and a very real signal, that the Pound was in big trouble.  More sellers flooded the market and that same day Britain said interest rates were moving up to 15%.  The announcement had little effect and was ultimately was not implemented.  Faced with a falling Pound and being unable to stabilize the currency within the band, Britain was forced to withdraw from the ERM.

In September alone the GBP/USD fell 15%, but the fallout continued.  By December the pair had fallen 25.4% – from a 2.0085 high in September to a 1.4980 low in December, 1992.
The falling Pound ultimately allowed the British economy to rebuild. It is for this reason September 16, 1992 is also called “Golden Wednesday.”

A Thankless JobAny discussion around the top currency trades always revolves around George Soros, because many of these traders have a connection to him and his Quantum Fund. After retiring from active management of his funds to focus on philanthropy, Soros made comments about currency trading that were seen as expressing regret that he made his fortune attacking currencies. It was an odd change for Soros who, like many traders, made money by removing pricing inefficiencies from the market. Britain did lose money because of Soros and he did force the country to swallow the bitter pill of withdrawing from the ERM, but many people also see these drawbacks to the trade as necessary steps that helped Britain emerge stronger. If there hadn't been a drop in the pound, Britain's economic problems may have dragged on as politicians kept trying to tweak the ERM.
The Bottom LineA country can benefit from a weak currency as much as from a strong one. With a weak currency, the domestic products and assets become cheaper to international buyers and exports increase. In the same way, domestic sales increase as foreign products go up in price due to the higher cost of importing. There were very likely many people in Britain and New Zealand who were pleased when speculators brought down the overvalued currencies. Of course, there were also importers and others who were understandably upset. A currency speculator makes money by forcing a country to face realities it would rather not face. Although it's a dirty job, someone has to do it.