Run on the Currency: A Sudden Loss of Confidence Leading to Sharp Currency Sell-Offs

A run on the currency occurs when investors and the public rapidly sell a country’s currency because they lose confidence in its stability or value.
This mass selling causes the exchange rate to fall sharply, often leading to financial crises, inflation spikes, or government intervention.

In simple terms, a run on the currency means everyone is trying to get rid of a currency at the same time, fearing it will soon lose value.

Core Idea

A currency run reflects a collapse in trust — either in the country’s economy, its central bank, or its ability to defend the currency’s value.
When people believe that a currency will weaken or that foreign reserves are running out, they rush to convert it into stronger currencies like the U.S. dollar or euro.
This rush creates a self-reinforcing cycle: as more people sell, the currency drops further, which prompts even more selling.

Such episodes often occur in emerging markets or during periods of political instability, unsustainable debt, or fixed exchange rate breakdowns.

In Simple Terms

A run on the currency is like a bank run, but instead of people withdrawing money from a bank, they dump the country’s currency before it loses value.

Example

Suppose a country’s currency, the “Zento,” is pegged at 10 Zentos per U.S. dollar.
Rumors spread that the government is running out of dollars to support the peg.
Investors start selling Zentos to buy dollars.

As panic spreads, everyone tries to convert Zentos into foreign currency — pushing its value to 15, then 20 Zentos per dollar within days.
The government eventually abandons the peg, and the currency collapses in value.

A real-world example is the Asian Financial Crisis of 1997, when Thailand’s baht came under speculative attack and triggered runs on several Asian currencies.

Real-Life Application

Runs on a currency are usually triggered by:

Loss of confidence in economic policy or government stability.

High inflation or fear of hyperinflation.

Large budget or current account deficits.

Falling foreign exchange reserves.

Speculative attacks by investors betting against a fixed exchange rate.

Governments and central banks may respond by:

Raising interest rates to defend the currency.

Intervening in foreign exchange markets using reserves.

Imposing capital controls to restrict outflows.

Allowing the currency to float freely after losing control.

Consequences

Sharp depreciation: The currency’s value plunges quickly.

Inflation surge: Imports become more expensive.

Economic instability: Confidence in banks and investments falls.

Debt burden increase: Foreign-denominated debt becomes costlier to repay.

Policy changes: Authorities may need IMF assistance or major reforms.

Common Misconceptions and Mistakes

“A currency run only happens in poor countries.” It can happen anywhere — even developed nations have faced pressure on their currencies.

“Central banks can always stop a run.” Once panic sets in, defending a currency can exhaust reserves quickly.

“It’s caused only by speculation.” Underlying issues like debt, inflation, or weak governance are often the real causes.

“A weaker currency is always bad.” Sometimes depreciation helps restore competitiveness — but a run implies disorderly collapse, not adjustment.

Related Queries Investors Often Search For

What causes a run on the currency?

What happens during a currency crisis?

How do central banks defend their currencies?

What is the difference between a devaluation and a currency run?

Which countries have experienced currency runs in the past?

Summary

A run on the currency happens when confidence in a nation’s money collapses, leading investors and citizens to sell it rapidly for safer alternatives.
This triggers a sharp fall in exchange rates and can cause inflation, financial instability, and loss of reserves.
Governments typically respond with emergency measures — such as higher interest rates or IMF support — to restore confidence and stabilize the economy.