Question

The market for foreign exchange is the largest financial market in the world with the largest volume of trades occurring in London, UK. Most of the participants in that market are commercial banks. Various countries central banks occasionally intervene in the market. What is the motivation for and intended effect of their intervention? Do you think they are able to achieve their goals? Do you think the introduction of the Euro has had an impact on the market? If so, what kind of effect?

Answer 1

Motivation for intervention into the market is related to stabilizing the the currency rate of an economy by the central bank because Central Bank will be the primary institution who will be responsible for maintaining the rate of exchange in an economy in order to support the money flow so they will be trying to intervene into the market through direct or indirect intervention and they will be trying to control the the depreciation or appreciation of their currency according to their needs.

Intended effect of their intervention is stabilization of the movement of the currency so that there will be lesser of the fluctuations in the money supply and demand in the economy due to forex changes.

Yes, they have been able to achieve their goals because they have large reserves of foreign currency which they are going to sell in order to stabilize their own domestic currency

Introduction of euro has a stabilizing effect on the overall global economy because of stability in the rates and it is also offering a single currency for different countries so it is providing with the stability in the overall Europe and it has led to proper sterilization and single rate adoption.the effect is related to stability in the European currency Markets and it has succeeded to a large extent.