Forex money market operations

The foreign exchange or forex market is the largest financial market in the use forex markets to hedge currency risk from foreign transactions.
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Foreign Exchange Operations

External Websites. Articles from Britannica Encyclopedias for elementary and high school students. See Article History. Alternative Titles: FX market, forex market.


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Get a Britannica Premium subscription and gain access to exclusive content. Subscribe Now. Learn More in these related Britannica articles: currency. Currency , in industrialized nations, portion of the national money supply, consisting of bank notes and government-issued paper money and coins, that does not require endorsement in serving as a medium of exchange; among less developed societies, currency encompasses a wide diversity of items e.

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Euro , monetary unit and currency of the European Union EU. It was introduced as a noncash monetary unit in , and currency notes and coins appeared in participating countries on January 1, After February 28, , the euro became the sole currency of 12 EU member states, and their…. Dollar , originally, a silver coin that circulated in many European countries; in modern times, the name of the standard monetary unit in the United States, Canada, Australia, New Zealand, and other countries.

Foreign exchange rates are of particular concern to governments because changes in FX rates affect the value of products and financial instruments.


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    8. As a result, unexpected or large changes can affect the health of nations' markets and financial systems. These factors, in turn, can influence inflation and economic growth. For example, suppose the price of the Japanese yen moves from yen per dollar to yen per dollar over the course of a few weeks. If the new exchange rate persists, it will lead to several related effects.

    First, Japanese exports to the United States will become more expensive.

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    Over time, this might cause export volumes to the United States to decline, which, in turn, might lead to job losses for exporters in Japan. Also, the higher U. Finally, U. Expected interest rate differentials between countries are one of the main factors that influence exchange rates.


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    Money tends to flow into investments in countries with relatively high real that is, inflation-adjusted interest rates, increasing the demand for the currencies of these countries and, thereby, their value in the FX market. Treasury primary responsibility for international financial policy. If the monetary authorities elect to intervene in the FX market, the intervention is conducted by the Federal Reserve Bank of New York. When a decision is made to support the dollars' price against another currency, the foreign exchange trading desk of the New York Fed buys dollars and sells the foreign currency; conversely, to reduce the value of the dollar, it sells dollars and buys the foreign currency.

    While the Fed's trading staff may operate in the FX market at any time and in any market in the world, the focus of activity usually is the U. At its core, it is a creation of a central bank. Monetary economists describe central bank money, or high-powered money, as the sum of currency outstanding and in the hands of the public plus commercial bank deposits or reserves held at the central bank.

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    This part of the money supply is state created. Add to this the money that is created privately in the banking system through expansion because of fractional reserve requirements. The implication is that money is a hybrid