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...
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