Currency Crisis
A sudden, severe loss of confidence in a country's currency that triggers rapid depreciation, capital flight, and often a broader financial and economic crisis.
What is Currency Crisis?
A currency crisis occurs when a country's currency undergoes a sudden and severe loss of value, typically triggered by a collapse in investor confidence in the government's ability to maintain its exchange rate or service its foreign debts. Speculative attacks — where investors sell the currency en masse — can overwhelm central bank reserves and force a devaluation or currency float. Currency crises often spill over into banking crises, sovereign debt defaults, and deep recessions as import costs soar, debt denominated in foreign currencies becomes unpayable, and capital flees. Classic triggers include large current account deficits, excessive short-term foreign debt, overvalued exchange rates, and weak fiscal positions.
Example
During the 1997 Asian financial crisis, speculative attacks forced Thailand to abandon its dollar peg in July 1997, triggering a regional contagion that spread to South Korea, Indonesia, and Malaysia. The Indonesian rupiah lost over 80% of its value, causing a severe recession and requiring an IMF bailout.
Source: IMF — The Asian Financial Crisis