The Main Players In The Forex Market
Central Banks
The majority of developed market economies have a central bank as their main monetary authority. The role of central banks tends to be diverse and can differ from country to country, but their duty as banks for their particular government is not trading to make profits but rather facilitating government monetary policies (the supply and the availability of money) and to help smoothen out the fluctuation of the value of their currency (interest rates).
Central banks hold foreign currency deposits called "reserves" also known as "official reserves" or "international reserves". This form of assets held by central banks is used in foreign-relation policies and indicates a whole lot about a countries' ability to repair foreign debts and also indicates a nation's credit rating.
While in the past reserves were mostly held in gold, today they are mainly held in Dollars. It is common for central banks nowadays to possess many currencies at once. No matter what currencies the banks own, the Dollar is still the most significant reserve currency. The different reserve currencies that central banks hold as assets can be the US Dollar, Euro, Japanese Yen, Swiss franc, etc. They can use these reserves as means to stabilize their own currency. In a practical sense this means monitoring and checking the integrity of the quoted prices dealt in the market and eventually use these reserves to test market prices by actually dealing in the interbank market. They can do this when they think prices are out of alignment with broad fundamental economic values.
The intervention can take the form of direct buying to push prices higher or selling to push prices down. Another tactic that is adopted by monetary authorities is stepping into the market and signaling that an intervention is a possibility, by commenting in the media about its preferred level for the currency. This strategy is also known as jawboning and can be interpreted as a precursor to official action.
Most central bankers would much rather let market forces move the exchange rates, in this case by convincing market participants to reverse the trend in a certain currency. 1 , 2 , next
Central Banks
The majority of developed market economies have a central bank as their main monetary authority. The role of central banks tends to be diverse and can differ from country to country, but their duty as banks for their particular government is not trading to make profits but rather facilitating government monetary policies (the supply and the availability of money) and to help smoothen out the fluctuation of the value of their currency (interest rates).Central banks hold foreign currency deposits called "reserves" also known as "official reserves" or "international reserves". This form of assets held by central banks is used in foreign-relation policies and indicates a whole lot about a countries' ability to repair foreign debts and also indicates a nation's credit rating.
While in the past reserves were mostly held in gold, today they are mainly held in Dollars. It is common for central banks nowadays to possess many currencies at once. No matter what currencies the banks own, the Dollar is still the most significant reserve currency. The different reserve currencies that central banks hold as assets can be the US Dollar, Euro, Japanese Yen, Swiss franc, etc. They can use these reserves as means to stabilize their own currency. In a practical sense this means monitoring and checking the integrity of the quoted prices dealt in the market and eventually use these reserves to test market prices by actually dealing in the interbank market. They can do this when they think prices are out of alignment with broad fundamental economic values.
The intervention can take the form of direct buying to push prices higher or selling to push prices down. Another tactic that is adopted by monetary authorities is stepping into the market and signaling that an intervention is a possibility, by commenting in the media about its preferred level for the currency. This strategy is also known as jawboning and can be interpreted as a precursor to official action.
Most central bankers would much rather let market forces move the exchange rates, in this case by convincing market participants to reverse the trend in a certain currency. 1 , 2 , next