Forex for Beginners: A Comprehensive Guide to Profiting from the Global Currency Markets by Adam Kritzer

Author:Adam Kritzer
Language: eng
Format: epub, mobi, pdf
Publisher: Apress®
Published: 2012-07-29T16:00:00+00:00

Monetary Policy and Central Bank Intervention

I’ve already talked about the role that central banks play in setting interest rates and tweaking money supply. Here I want to examine some of the other ways in which they can influence the forex markets.

First are the central banks’ open market operations. Open market operations are now arguably the most prominent weapon in a central bank’s arsenal. During periods of recession, when inflation is low, central banks can literally print money in order to fund purchases of financial securities. The central bank holds these securities on its balance sheet with the intention of selling them off once the economic pump has been fully primed and inflation has taken hold.

In the wake of the credit crisis, the world’s major central banks stunned the markets with the scope of their open market operations. The Fed’s program was particularly ambitious. In a process known as quantitative easing, the Fed purchased almost $3 trillion worth of financial securities in two discrete blocks. (See Figure 5-24.) Critics worried that the bank had sacrificed its independence, that it was enabling record US government borrowing, and that it would foment asset price bubbles and inflation. As a result, the currency markets punished the dollar severely after each round of quantitative easing was announced. Whether their concerns were justified ultimately depends on whether the Federal Reserve Bank can unwind the program (by selling the securities on its balance sheet back to private investors) when inflation picks up.

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