What makes countries with fixed exchange rates prone to speculative attacks? Why don't the central banks of these countries stop these attacks?

Question

What will be an ideal response?

Answer 1

In order to maintain a fixed exchange rate the central bank has to be willing to buy and sell as much currency as foreign currency traders presented. This requires the central banks to have ample international reserves, which can be difficult to obtain and expensive to hold. If foreign currency speculators begin to doubt a central bank's ability to maintain the exchange rate they can attack the currency by borrowing large amounts of the currency and presenting them to the central bank for payment in a different currency which could be invested in short-term securities of the country pertaining to that currency, These actions by the speculators drain the central bank of its international reserves and usually result in the central bank having to give up the fixed exchange rate. The reason that central banks do not stop the speculators is the speculators have ample resources.