Saturday, September 5, 2009

Central Bank intervention affect on exchange rates

Overhanging the currency markets today is the ever present possibility that central banks will become active participants. Major central banks around the world, including the Federal Reserve System, the Deutschbank in West Germany, and the Bank of England, may decide on a given day that their national currency is declining too rapidly in value relative to one or more other key currencies. Thus, if the dollar falls precipitously against the mark, support operations by Federal Reserve in cooperation with the Deutschbank may be employed to stabilize the currency markets. Usually, central bank intervention is temporary, designed to promote a smooth adjustment in currency values toward a new equilibrium level rather than to permanently "prop up" a week currency. We will have more to say about central bank intervention in the currency markets.

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