In theory, a currency’s value mirrors the fundamental
strength of its underlying economy, relative to other
economies, in the long run.
In the short run, currency trader expectations play a
much more important role.
In today’s environment, traders and lenders, using the
most modern communications, act on fight-or-flight
instincts. For example, if they expect others are about to
sell Brazilian reals for U.S. dollars, they want to “get to
the exits first.”
Thus, fears of depreciation become self-fulfilling
prophecies.