The Sterling Crisis: Gamblers count proceeds of a one-way bet on currency: The foreign exchange markets

IT IS the forces of speculation, not commerce, that dominate the foreign exchange markets.

Whether American, Japanese, German, Swiss or British, the pressure they can exert on a currency snowballs quickly into an irresistible force if the markets become convinced of the direction a currency is taking and know that a profit is certain.

It was all very different at the time of Britain's last formal devaluation in 1967.

Then, it was the reactions of exporters and importers which caused a currency crisis. As one, they decided to sell sterling.

Although there were speculators who dealt only for profit in those days - the infamous 'gnomes of Zurich' who were castigated by the late Lord George Brown - they did not always dominate the markets.

The market today is enormous. The most recent survey by the Bank of England put average daily turnover in London in 1989 at dollars 187bn ( pounds 100bn) - on paper, one-fifth the size of the British economy.

Of this, dollars 56bn was trading in sterling against dollars or German marks.

Furthermore, the bulk of the business was done between one bank dealing desk and another. The survey found 85 per cent of the turnover represented professional dealings between banks.

Only 15 per cent was linked to customers' business transactions - the export of a car, of a shipment of oil or an insurance contract.

That balance gives the banks enormous influence on foreign exchange trading.

Indeed, a key part of the business of banks and other professional investors is to make money from their dealings in the markets.

So senior managers will be demanding explanations if their traders do not make a decent profit from a sterling devaluation.

At the moment, some are doing the same as their commercial customers, adjusting their sterling holdings to reduce their risks. But others are single-mindedly chasing profit.

So who are the speculators? According to Derek Wanless, chief executive of National Westminster Bank, they are 'anybody like a bank or an investment house which has access to large amounts of money, wants to play the markets and sees something which is a one-way bet'.

Last week, the speculators sold the lira in the belief that it would probably be devalued.

They made a huge profit at the expense partly of the German Bundesbank, which spent DM24bn ( pounds 8.6bn) buying lira to support the Italian currency up to the weekend, when it was devalued by 7 per cent.

This week, those dealers have seen the same easy profit in sterling.

United States investment banks based in London are said to have been particularly aggressive in chasing a profit this week at the expense of sterling, having become convinced on Monday that it would be devalued soon.

But banks from every major financial centre are likely to be playing a role, as are professional investment institutions such as pension and insurance funds.

Even at substantial interest rates, it is now hard to find a buyer for pounds. It would take six months or a year to recoup as much in interest payments as an investor could lose in a few days if there was a devaluation.