Foreign Exchange Markets in Global Research Paper

Total Length: 686 words ( 2 double-spaced pages)

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However, using a portfolio balanced channel, agents of the government balance their portfolios among domestic money and bonds as well as foreign currency and bonds. When economic conditions change, the portfolio is adjusted to a new equilibrium which in turn, influences the exchange rate. Agents can also view futures on exchange rates by looking at how certain countries are intervening in monetary policy. This method requires the reading of signals, because the change of expectations rate will also affect the current market rate (Muss, 1981).

Finally, although there are many ways to influence foreign exchange markets, governments can use their foreign exchange currency reserves to prop up a currency that is falling. For example, if the British Pound is falling, a government could sell U.S. Dollars and put them in Pounds, thus increasing the value of the Bound. Governments can also borrow from other countries to purchase pounds, or to even lower inflation, in which this case would allow British goods to be more competitive, and thus increase the demand for pounds.
The manipulation of both covert and overt methods to influence the market do take time to balance out the equation. Simple 1-2 trades will not balance out past rivalries or animosities (Pettinger, 2010).

REFERENCES

Graham, a. (2000). Foreign Exchange Markets. London: Fitzroy Dearborn.

Levinson, M. (2006). The Economist Guide to Financial Markets. London: Profile Books. Retrieved from: https://docs.google.com/file/d/0B_Qxj5U7eaJTZTJkO DYzN2ItZjE3Yy00Y2M0LTk2ZmUtZGU0NzA3NGI4Y2Y5/edit?pli=1&hl=en

Muss, M. (1981). The Role of Official Intervention. Fairfax, VA: George Mason University Press.

Pettinger, T. (2007). Government Intervention in the Foreign Exchange Market. Economics Help. Retrieved from: http://www.economicshelp.org / macroeconomics/exchangerate/government-intervention.html

Sarno, L. And Taylor, M. (2001). Official Intervention in the Foreign Exchange Market" Is it Effective and, if So, How Does it Work? Journal of Economic Literature. 39 (3): 839-68, Retrieved from: http://www.cass.city.ac.uk/__data/asset s/pdf_file/0008/40697/sarno_taylor_jel.pdf.....

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