Final answer:
Destabilizing speculation in the Bretton Woods system occurred when investors sold overvalued currencies and bought undervalued currencies, making it challenging to maintain fixed exchange rates.
Step-by-step explanation:
Destabilizing speculation played a role in the demise of the Bretton Woods system because investors sold currencies they believed to be overvalued and purchased currencies that they believed to be undervalued. This speculative behavior made it difficult to maintain fixed exchange rates between currencies as the demand for overvalued currencies decreased and the demand for undervalued currencies increased.
For example, let's say a currency is fixed to the US dollar at a rate of 1:1. If investors believe that the currency is overvalued and will decline in value, they will sell the currency in exchange for US dollars. This would decrease the demand for the overvalued currency and lower its exchange rate. On the other hand, if investors believe that a currency is undervalued and will appreciate in value, they will buy the currency. This would increase the demand for the undervalued currency and raise its exchange rate.
When many investors engage in such speculation, it can lead to significant fluctuations in exchange rates and make it impossible for countries to maintain fixed rates as required by the Bretton Woods system. This ultimately contributed to the demise of the system.