foreign exchange market intervention
DESCRIPTION
Foreign Exchange Market Intervention. Amie Colgan, Mary Deely, Fergus Colleran, Anna Nikolskaya. Exchange Rate Intervention. Buy or sell foreign currency/assets to affect the exchange rate Purchases push down the home currency value of the exchange rate Sales push it up. - PowerPoint PPT PresentationTRANSCRIPT
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Foreign Exchange Market Intervention
Amie Colgan,Mary Deely,Fergus Colleran,Anna Nikolskaya
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Exchange Rate Intervention
•Buy or sell foreign currency/assets to affect the exchange rate
•Purchases push down the home currency value of the exchange rate
•Sales push it up
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Influencing the Exchange RatesIncreasing the exchange rate Decreasing the exchange rate
• Buy domestic currency and sell foreign assets
• money supply • production• inflation• domestic interest rates• demand for investment• Increases exchange rate
• Sell domestic currency and purchase foreign assets
• money supply• production• domestic interest rates• demand for investment• Decreases exchange rate
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Why Intervene?
•Stabilise Fluctuations• International trade and investment decisions• Dependent on exchange rates
•Reverse the growth in the country’s trade deficit• Rise when exchange rates rise• High currency – cheaper foreign goods and
services• Increasing imports and reducing exports• Rising trade deficit – Intervention needed
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Types of Intervention
•Sterilized Intervention – has little or no effect on the exchange rate
•Unsterilized Intervention – has a higher impact on exchange rates
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How does Sterilized Intervention differ from
Unsterilized Intervention?
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Unsterilized Intervention• Central Banks purchase/sell domestic currency to
sell/purchase foreign assets which expands/contracts the monetary base.
• These actions may decrease/increase the money supply which in turn affects prices, inflation and in turn interest rates .
• Passive approach of intervention by Central Banks.
• Allows for foreign exchange markets to function without manipulation of the supply of domestic currency.
• Has a higher effect on interest rates and liquidity.
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Unsterilized Intervention• Unsterilized Intervention is used when a Central Bank wants
to change it’s monetary conditions
• It has an overall greater effect on money supply interest rates and foreign exchange rates.
• It takes time to come into effect, not useful if Central Bank wants an immediate change in exchange rates.
• Has long term effects on the exchange rates.
• Not used as often because it conflicts with monetary policy.
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Sterilized Intervention• Buying or selling domestic currency in order to sell or purchase
foreign assets to slightly affect exchange rates.
• This can expand or contract the monetary base.
• Sterilising means offsetting this expansion/contraction by selling or purchasing government bonds in the domestic bond market to bring back the monetary base to it’s target level.
• When Central Banks want to leave money supply and interest rates unaffected.
• Maintains price stability
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Sterilized Intervention• Intervention in exchange rates without affecting its domestic liquidity.
• Process limits the amount of domestic currency available for exchange.
• Altering its debt composition without affecting its monetary base.
• Sterilised Intervention has little effect on long-term exchange rates.
• Almost immediate effect on demand and supply of foreign exchange.
• Affects expectations about future exchange rates, particularly if open market operations are hidden.
• It’s effect on exchange rates is not as obvious an Unsterilized intervention.
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Diagram of Sterilised Intervention where
• AA and AA’ are the money supply • E is the exchange rate• Y is GDP• F is the equilibrium rate • D is demand for money
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Effects of Central Bank Action on Exchange Rates•May be intentional or not
•Motivation: (1) Resist short run trends in exchange
rates (2) Correct medium-term “misalignments”
of exchange rates away from fundamental values
•Decline in the frequency of intervention
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Federal Reserve
•Quantitative Easing
•Wed 18/3/09 –Fed announced it is to buy $300 billion in long term treasuries &
$750 billion in mortgage-backed securities Create more liquidity –print money
•Euro rose 3.2% to $1.342 after the statement
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Euro/Dollar fx rate Wed 18/3/09 – thurs 19/3/09
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Statement of G7 Finance Ministers and Central Bank Governors:
•“Excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability.”
•14th February
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Swiss National Bank (SNB)•12th March•Aim: ‘push down’ Swiss franc•SNB cut its 3-month LIBOR target rate by 25
basis points (to historic low of 0.25%)•Sold francs for euros and dollars•SNB said it’s planning to increase liquidity
by ▫Engaging in repo operations▫Buying Swiss franc bonds issued by private
sector borrowers▫Purchasing foreign currency on the FX market
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Swiss Franc
Swiss Francs to 1 US dollar Swiss Franc to 1 Euro
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Bank of England•5th March
•Quantitative easing: up to £150 billion▫up to £75 billion mostly in medium and long-
term gilts over next 3 months▫£50 billion private-sector assets
•Cut repo interest rate by 50 basis points to 0.5%
•£ has depreciated against both € and $
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British Pound
British Pound to 1 US Dollar British Pound to 1 Euro