Where to exchange currency in copenhagen
Exchange Rates: Interventions in Currency Markets
okay hi there welcome to a macro video
in this revision topic video we're going
to spend a few minutes looking at the
reasons why a central bank or government
might opt for a managed floating
currency system and also the options for
intervention in currency markets if they
want to influence they want to change
the level of the exchange rate so a
managed floating currency happens when
the central bank chooses to intervene in
the foreign exchange market designed to
affect the value the external value of
one currency against another oftentimes
to meet specific macro economic
objectives which we'll talk about in a
second or two
the latest IMF classification of
countries using a managed floating
system includes the likes of Brazil
South Korea India the Indian rupee is a
managed floating system so to the Thai
Baht the Mexican peso the Japanese yen
many countries actually opt for a
managed floating indeed more countries
or for this than they do for a free
floating system it has an example of a
country which is a free I saw at
currency which is a free float the euro
set against the rupee which is a managed
floating currency you can see that over
the over the long-term of a 17 year
period the Indian rupee has depreciated
against the euro back in 2001 about
forty to forty three rupees would buy
you or your now it's now it's over
eighty why might a central bank perhaps
working in conjunction with the
government why might they try to manage
the currency through intervention well a
central bank might want to bring about a
depreciation of the exchange rate if
they're looking to improve the balance
of trade in goods and services you see a
fall in the currency helps to make
exports more price and cost competitive
in overseas markets but how
a depreciation in the currency is also
targeted favored because of the risk of
a deflationary recession weaker currency
makes import prices more expensive and
again should stimulate to the export
sector or perhaps it's part of a
medium-term shift designed to try to
rebalance an economy away from high
levels of domestic spending on goods and
services tilting more towards increased
export volumes and associated capital
investment
sometimes the central bank wants to
appreciate increase the value of the
currency perhaps because they fear both
demand pull and cost push inflation or
they think that a stronger exchange rate
will help to bring down the cost the
price of imported capital new technology
or essential inputs such as fuel designs
to enhance the long-run growth potential
of a country there are other reasons
I mean generically one reason to manage
the exchange rate is to reduce the
volatility of exchange rates in part
because if the currency is volatile if
the big fluctuations from one month to
another that can increase investor risk
and perhaps damage potential trade and
investment and business confidence if
the risk of overseas investors buying a
government bonds goes up for example
they might demand if you like a premium
interest rates or yield on bonds as
compensation for the volatility in
exchange rates moving on
how can intervention work what can one
of the tools available for central banks
to intervene in the market try to manage
the exchange rate the first option is
direct buying and selling of a currency
by changing reserves of foreign
currencies now this is a crucial point
so to manage a floating currency the
central bank will need enough reserves
or foreign currency available should it
need to intervene
a second option second tool is to change
your own inter
straights so perhaps monetary policy
interest rates might be tilted one way
or the other to achieve a desire to
change in the exchange rate because they
affect flows of hot money across
international financial markets it's
also possible to use the tax system to
manage the exchange rate for example you
might want to tax the interest on
savings of foreign investors in the
country that won't be designed to make
saving and a country less attractive you
might want to tax for example the
profits of overseas subsidiaries let's
quickly look at a currency intervention
summary there hopefully this slide when
we get to the end will be a nice neat
summary for you to to take a look at for
your notes so let's think about direct
intervention first of all we'll bring
the diagrams into play in a second or
two so if you want your currency to
depreciate to go down and value
typically the central bank would go into
the market and they would go into a
currency market and they would sell
their own currency that home currency
and they would buy foreign currency the
result being that foreign currency
reserves would increase if they want me
exchange rate to appreciate they would
go into the market and buy their own
home currency selling foreign currency
reserves as a result those reserves will
diminish here's a good example just
recently when Denmark actually has a
fixed exchange rate against the euro but
there's a good example of the Danish
currencies been under downward pressure
recently and the Danish central bank has
decided to intervene and the foreign
currency market by buying up their own
currency to support the nation's PEC so
they sold just over half a billion
kroner 60 million dollars worth of
currency of course that would add to
their dollar reserves second option one
intervention is through interest rates
so if you wanted your currency to
depreciate to go down in value or an
option would be to lower your loan
interest rates designed to cause a hot
money outflow or perhaps just to
diminish the hot money inflow either way
the currency could fall
again if you wanted the currency to
appreciate you might want to increase
interest rates to attract inflows and
pot money danger of course with that is
that higher interest rates might help to
support the exchange rate but could also
damage consumer spending business
confidence prospects for the housing
market etcetera they could well be a
trade off if you did that there are
alternative interventions if you want
your currency to depreciate and one
option is for the central bank to expand
quantitative easing that increases the
domestic supply of money some of which
will seep out off the economy and
therefore bring the exchange rate down
QE also is designed to reduce the yield
and bonds and if interest rates go down
again that makes an economy less
attractive to hot money flows the
government could also buy assets from
overseas as part of an intervention
strategy if you want your currency to
appreciate well perhaps you you want to
attract money into your currency so you
might reduce taxes on income from assets
to attract overseas investors to buy
your currency analysis diagrams always
useful to get those top KO marks so here
will be an intervention to cause of
currency depreciation the idea here
would be you know going into the market
to sell your currency and buy up foreign
currencies that would shift the supply
curve for currency out to the light
catches pelvis for a given level of
demand that would cause the exchange
rate to fall and if you wanted to
appreciate your currency then the
central bank could go into the market
and buy their own home currency using
reserves of foreign exchange causes the
currency demand for your currency to
shift out to the right and other things
being the same equilibrium value it's
still about of the currency goes up
British Pound is a free floating
exchange rate as it is against the
against as is the US dollar so this
shows the British Pound Sterling to the
US dollar from start of 2015 to autumn
2000
19 and you can see that the pound has
been on a pretty much a downward
trajectory particularly in the aftermath
of the books it left Windham in 2016 and
the parent has been quite volatile range
between sort of $1 20 and $1 nearly $1
60 over this period so with the floating
exchange rate where the Bank of England
doesn't directly intervene oftentimes
you will get quite big movements in the
exchange rate an interesting quote from
the Bank of England from their website
we do not set the exchange rate the UK
has a free floating exchange rate but
our actions can indirectly affect the
value of the pound
in other words interest rates and QE can
have an indirect effect even if the UK
government and the central bank do not
specifically target the exchange rate so
there we go an overview video on
interventions in currency markets
