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Should a central bank use its currency reserves to support the value of its country's currency in the foreign-exchange market? What can be achieved by such intervention?
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| Submitted: Thu Nov 20 2003
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SHOULD A CENTRAL BANK USE ITS CURRENCY RESERVES TO SUPPORT THE VALUE OF ITS COUNTRY'S CURRENCY IN THE FOREIGN-EXCHANGE MARKET? WHAT CAN BE ACHIEVED BY SUCH INTERVENTION? INTRODUCTION: For International Business to operate there needs to be a currency exchanged mechanism. The need to exchanged currencies will stem from either investment to meet one's cost or to repatriate the profits that the business has accumulated in foreign countries. Foreign exchange is a commodity that consists of currencies issued by counties other than one's own. Like the prices of other commodities, the price of foreign exchange- given a flexible exchange rate system- is set by demand and supply in the marketplace. A country's central bank has an "official reserves account" where it holds reserves which are used to intervene in the foreign exchange market. These reserves hold different assets, mainly gold and convertible currencies. These convertible currencies are hard currencies, that is currencies...
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