Why Do Central Banks Intervene In The Foreign Exchange Markets? Discuss.


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Ellie Hoe answered

Foreign exchange markets provide funds to the economy and play an important role in circulating money in the market. If an economy has excessive money, then it can buy foreign assets to decrease the money supply by investing its currency in the foreign assets. Similarly if an economy has liquidity problems or if it requires money in the economy, then central bank might sell its foreign assets in exchange of its currency. Hence central banks keep on changing their policies and actions regarding increasing and decreasing its foreign reserves to strengthen its economy. Intervention of central banks in foreign exchange markets allow the economy to control inflation, interest rates, valuation of their own currency, management of their foreign assets, investment and hence directly impact the monetary policy of a country.

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