The correct option is 1 and 3 only.
Explanation
A speculative attack is a massive selling of a country's currency assets by investors who anticipate a future decline in its value. This phenomenon is primarily observed in economies maintaining a fixed or pegged exchange rate system, where the market price deviates significantly from the fundamental value.
- Statement 1 is Correct: Speculative attacks are inherently associated with fixed exchange rate regimes. In these systems, the central bank commits to maintaining a specific value for the currency. If economic fundamentals (such as high inflation or fiscal deficits) become inconsistent with the fixed rate, speculators anticipate a correction and target the peg. In a floating exchange rate system, the currency adjusts continuously to market forces, preventing the build-up of pressure required for such a structural attack.
- Statement 2 is Incorrect: A speculative attack typically involves the aggressive selling of the domestic currency, not buying. Speculators borrow the domestic currency and sell it for foreign currency, expecting the domestic currency to devalue (lose value). If the devaluation occurs, they buy the domestic currency back at a lower price to repay their loans, securing a profit. The goal is to force a devaluation, not a revaluation.
- Statement 3 is Correct: The primary driver of a speculative attack is the market's doubt regarding the government's or central bank's ability to maintain the fixed exchange rate. When investors perceive that the central bank's foreign exchange reserves are insufficient to defend the peg against sustained selling pressure, they accelerate the sell-off, often making the collapse of the fixed rate a self-fulfilling prophecy.
Key Takeaway: A speculative attack occurs when investors lose confidence in a fixed exchange rate peg and aggressively sell the domestic currency, depleting foreign exchange reserves and forcing a devaluation.