Final answer:
When investors sell off assets in a currency they believe is overvalued, it leads to a currency crisis, characterized by a decrease in currency value due to increased supply and reduced demand.
Step-by-step explanation:
When financial investors fear that an overvalued currency may soon be devalued, their frantic selling of assets denominated in that currency leads to a currency crisis.
This is driven by an expected depreciation in a currency, causing an increase in the supply of the currency and a decrease in its demand. As a direct consequence, there is a decrease in the value of the currency relative to others, such as the decline of the pound vis à vis the dollar when investors divest themselves from it.
An illustrative result of such actions is when lower U.S. interest rates diminish the desirability of U.S. assets and lead to a decrease in demand for dollars
Increased supply and reduced demand in foreign exchange markets prompt a depreciation of the dollar compared to the euro. This market behavior underscores how beliefs about the future path of exchange rates can significantly influence currency valuations.