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5:00Currency Pegs and Their Collapse: The 1992 Bank of England Mechanics
On 16 September 1992 the Bank of England raised interest rates twice in one day and burned through billions defending the pound. By 7pm it surrendered, and one trader walked away about $1bn richer.
A currency peg is a promise: the central bank commits to keep its exchange rate inside an agreed band. The UK made that promise in October 1990 by joining the European Exchange Rate Mechanism (ERM), fixing sterling at a central rate of DM 2.95 to the pound, with a permitted band of ±6%. The floor sterling could not fall below was therefore about DM 2.7780. Holding that line meant defending it with two tools, and both have a hard limit.
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