How George Soros made $1 billion shorting the pound

Julie Brownlee, Fsp Invest, 26 Jun. 2015

Tags: george soros, forex, shorting the pound, successful forex traders, pound,

If you haven’t heard of George Soros, he’s a billionaire trader.

To amass his fortune, he’s obviously been successful. But he’s renowned for a forex trade that made him $1 billion in just one day back in September 1992.

So how did he manage to achieve this?

Read on to find out…

How George Soros achieved his forex fortune

George Soros walked away with a $1 billion profit after shorting the pound. This happened before the introduction of the euro seven years later. Back then, European countries still traded under their own currencies.

In 1979, a number of countries rallied together to allow an easy way to interchange their currencies with other European states. They introduced the European Exchange Rate Mechanism (ERM).

The countries in the ERM fixed their exchange rates against a major world currency. The strongest economy at the time was Germany, so each country used deutschmarks to fix their currency to.

Even though the UK was a member of the European Economic Community (ECC), initially it decided not to fix its exchange rate and kept the pound a floating currency. In other words, the pound wasn’t fixed to the deutschmark and the UK didn’t join the ERM.

The undoing of the pound

But in 1990, the UK decided to peg its currency as inflation had climbed to over 10%. It hoped the move into the ERM would help stabilise its economy and lower inflation.

Inflation did fall, but the move didn’t stabilise the economy, Abby Higgs in Money Morning US explains.

In 1992, Germany was suffering economically after the unification of East and West Germany. This led it to increase interest rates. This meant countries who were part of the ERM had to do the same, including the UK.

At this time, the pound was overvalued.

George Soros was aware of the UK’s unstable entry into the ERM. So he entered short positions in pounds as he expected a European financial crisis was nearing.

To keep in the ERM, countries had to keep their exchange rates within designated bands. If a country didn’t do this, it had to withdraw from the ERM.

The UK really struggled to keep its currency within the designated bands.

The pound plummeted

On 15 September 1992, Soros began selling off pounds in huge amounts. This resulted in a massive weakening of the pound. And this meant the UK’s exchange rate was nearly falling below the ERM’s lower band.

The following day, known as ‘Black Wednesday,’ the Bank of England started buying large amounts of pounds to stabilise the currency. But it didn’t work. By mid-morning, it hiked rates 2% to 12% to attract investors to buy the currency.

This didn’t work either. By mid-afternoon, the bank hiked rates another 3% to 15% to stem the fall of the pound.

The pound fell 9.5% that day. This move saw George Soros bank $1 billion.

Whilst it’s unlikely you’ll identify a forex move like this on the horizon, it shows you the power of a large position in the market can have on a currency.

So there you have it. How George Soros made $1 billion shorting the pound.

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