KEY POINTS:
In 1992 currency speculator George Soros took on the Bank of England and won, earning himself US$1 billion.
This week's Reserve Bank of New Zealand intervention hasn't handed speculators such an opportunity.
Speculators can profit by betting against a central bank that tries to protect a currency at all costs. The Reserve Bank, however, will not fight the market.
In 2004, then Deputy Governor Adrian Orr said he didn't expect the Reserve Bank's currency interventions to attract speculators.
"We do not intend wasting our reserves by defending a particular exchange rate level, nor do we intend standing in the way of strong market trends or beliefs," Orr said.
"If we are not defending a particular level of the exchange rate, we have no mechanical rule, and we intervene consistent with our monetary policy objectives at opportune times, then it is unclear what nature of speculator would be attracted by our actions."
In 1992, the Bank of England's approach was to defend the pound at all costs. The pound was not a free-floating currency. It was pegged at 2.95 deutschmarks to the pound, and if it moved more than 6 per cent in either direction the English central bank had to intervene. In 1992 high German interest rates forced the deutschmark up and the pound down.
Soros, a billionaire fund manager, and other speculators expected that Britain would eventually be forced to devalue the pound, so they borrowed pounds to buy deutschmarks in the hope that when the pound dropped they could pocket the difference.
The Bank of England raised interest rates twice in one day to prompt investors to buy sterling. On that day - Wednesday, September 16, 1992, known as "Black Wednesday" - the Bank of England spent £15 billion trying to prop up the currency, according to Robert Slater's unauthorised biography of Soros.
The speculators kept piling in and eventually the Bank of England was forced to devalue the pound.
After punting US$10 billion, Soros walked away with a US$1 billion profit. "It was an obvious, one-way bet," he was quoted saying afterwards.
The Reserve Bank won't be providing such one-way bets.
"An important part of the bank's consideration to intervene would be the dynamics of the foreign exchange market at the time and whether we feel our actions will be effective," Orr said in 2004.
"The bank would intervene at opportune times, not when the currency's direction is being dominated by strong international trends or consensus opinions."
