The impact of foreign exchange is normally underrated by many due to lack of knowledge on the core macroeconomic elements attached to foreign exchange. In what is majorly a global issue with far reaching links to inter-national relationship, the foreign exchange indices have been used as one of the major benchmarks of trade and economic growth in any nation. In the global market, the competitiveness of a nation is normally determined through a country’s performance in the foreign exchange market. For this reason, the intervention by the government in the foreign exchange market became a vital issue the affected the nature of the global financial market as well. While discussing this important economic indicator in any country, explores foreign exchange intervention in the emerging exchange markets, the use of foreign exchange intervention in emerging foreign exchange market, how the intervention helps in financial market stabilization, an evaluation of Trump’s perspective on the foreign exchange intervention of the emerging markets as well as the conclusion of the whole matter.
It is important to understand the basic principles that operate foreign exchange and the economy at large. Foreign exchange has to do with currency comparison with others, the price of one currency in terms of the other, especially in the foreign market. However, according to Domanski, Kohlscheen & Moreno (2016), foreign exchange involves buying, selling, as well as exchanging currencies at the current or agreed prices. These currencies are exchanged at the market determined rate in a global decentralized market or at an over-the-counter market perspective. The level of the exchange rate of the concerned currency has a lot of effect in the velocity of money and the liquidity ratio in a country. The international market is majorly controlled by the foreign exchange terms that dictate the market competitiveness of the various products from the various countries with various currency values. The standard currency, that acts as the focal point currency is the US dollar.
According to Moreno (2011), since the global financial crises of 2008-2009, the global players have been very careful with the global market indicators such as foreign exchange. In most cases, when the financial markets gets over board and leading to a crushing points, the financial policy makers have invoked the help of the foreign exchange intervention into the emerging market for reasons of stability. Therefore, the fluctuations in the market are under the controlling sphere of the foreign exchange.
The foreign exchange intervention by the government into the international market involves an intervening group who buys or sells certain specified foreign currency. At the same time, they also buy or sell an equivalent value of the local currency in the foreign exchange market by means of virtual trading method, sometimes real (Newman, Potter & Wright, 2011). This process changes the demand and supply of the target foreign currency as well as the local currency through the adjustments of the two prices. In this case, when in need of changing the phase of the international financial market, the government at certain timeframe creates the new nominal exchange rate that is very effective between the local currency and the target currency, thus making the franchise reactions for the local currency in terms of the pool of the foreign currency.
The foreign exchange market plays an important role as a mechanism through which currencies are traded, being sold or bought. The major aspect of this market is the pricing aspect and the rate of the trade that determine the direction of the market at any period. For the case of international market and business, the foreign exchange markets serves functions like, currency hedging which involves the fluctuation rates of the currencies at the foreign exchange market increases in greater amounts or decrease in greater levels than some times anticipated. Hedging of the currency, therefore, involves protecting against the potential losses that may come up when the conditions are harsh as a result adverse changes of the exchange rates. It is also involved in the conversion of currency, currency speculation, and currency arbitrage.
The above functionalities and the introduction of the advanced financial technologies have caused massive changes in the affairs of the foreign exchange markets. Governments are today taking advantage of what the foreign exchange market offers to influence major financial decisions, but also to intervene in their international financial markets for stability. For reason of sustainable financial position for the country in the foreign exchange market and also to remain relevant in the same market, there is greater need to stabilize financial markets.
According to the argument of Banerjee, Zeman, Ódor & Riiska (2018), the aftermath lessons of the great financial crises made the emerging markets to become very active on the foreign affairs and markets. These economies are very careful with the constant increment of reduction of the US dollar and have become increasingly exposed to the flows that take place I the global financing process, which have the tendencies of affecting the demand and supply of the foreign currencies. In addition, as a result of the above issues, the foreign currency’s supply and demand attention and financial stability has become a very important tool and motive for intervention that is used by emerging markets.
Certain developments, tactics, and instruments that are in line with the vital significance of the financial stability are considered. For an effective intervention by the emerging markets in the foreign exchange markets, it is important to make it a timely affair that is critical in improving foreign exchange market liquidity resulting into certain credibility reserve gains and holdings. According to Bordo, Humpage & Schwartz (2016), the increased carrying cost of holding reserve have made the countries that have higher credit rating to have more advantage that enables them to reduce their reserve buffer size.
Therefore, due to the changes that have occurred since 2008 to 2013, most financial institutions and central banks of the emerging markets have adjusted their foreign exchange market operations to adapt to the evolving market and policy backdrop (Ghosh, Ostry & Chamon, 2016). It is also clear in noting that the large and frequent changes in the capital flows and the mismatches in the broadening currency have increased the strength to the policies meant to exchange the volatility rate providing the private sectors some protection against the risks involved in the exchange rates.
In the foreign exchange market, the words of the global leaders have power in the trading systems of supply and demand. This has made the foreign exchange market to seriously speculative in nature after the 2008-2013 financial crises in the world (Blanchard & Adler, 2015). Due to the increased growth in the emerging foreign market currency debt which has been occasioned by foreign currency borrowing, there has been an increasing surging in the US dollar dominated debt among the non-bank borrowers. It is also critical to realize that the surge in the value of the US dollar against a specific currency has its own devastating financial effects.
As the president of a dominant player in the foreign exchange market, MR. Trump’s arguments are aimed at increasing the speculative elements in the foreign exchange market, a fete that I do not agree with. The free flow of the supply and demand of the foreign exchange market has been advantageous to the emerging foreign exchange markets that may be affected by the Trump factor (Fratzscher, et al. 2017). Therefore, by trying to associate the exchange rate issue with the Free Trade Agreement as evidenced by the case of the revised bilateral FTA between the US and South Korea in April 2018, Trump’s administration is in the process trying to cause unnecessary bully in the free market that would eventually destabilize the emerging foreign exchange markets in the world (Trivedi & Srinivasan,2016).
Having mastered the art of the foreign exchange market system, some emerging market nations, like the Chinese foreign exchange markets, have been using the Foreign exchange intervention as a tool for trade competitiveness which may affect negatively to the U.S. based on the economic projections, it is true that with the Chinese progress in the Foreign exchange markets, it is amercing huge pool of financial resources that are standing as a major threat to the US government (Wang, Li, & Liu, 2015). In the event of all these, the US governments have been on record blaming China on currency manipulation, a fact that the Trump administration is echoing with the adverse side which may work against the US this time. In every complaint, there are two sides of the coin, but with a deeper truth hidden than that meets the eye. The Chinese manipulation that ignited the US blame involved the Chinese Central bank lowering the value of its currency so that the can export their products cheaply in the international market. The threat is that it led to trade competitiveness in the international market with the strategy causing higher trade deficit.
The mastermind international trade control and regulation caused rifts in terms of terms of trade with the US government reacting to the manipulation effects of the Chinese government. This, they did be increasing the tariffs on the imported products mostly from China as well as other countries in the world in which there were trade surplus gain against the US. In this way, b putting such trade tariff measures in the international market, the Trump administration trade policies are already affecting the global business negatively.
Conclusion
The movement in the global economy is already climbing the technological ladder. Many emerging foreign exchange market are getting to the technical level that may see them move higher and higher. In most cases, the bigger economies like the US feel the pinch of competition, thereby developing political master plans to affect the free flow of supply and demand in the foreign exchange market. Although the Trump administration is trying use the foreign exchange market to reinforce the financial might of the US against its competing counterparts like China and others, these actions are already affecting the free flow of demand and supply in the market. Through the hedging, arbitration, conversion, and the speculative process in the systems of the foreign exchange markets, the emerging foreign exchange markets are becoming technologically, financially, and economically proactive to make interventions into their financial policies. In this case, therefore, there is a great influence and financial intervention role that the foreign exchange markets play in influencing the financial status of the emerging economies, especially after the 2008 to 2009 global financial crises.
Therefore, it is recommended that the free flow of products and services in the international market should be allowed to be controlled by foreign exchange items, i.e. currency interactions.
References
Banerjee, B., Zeman, J., Ódor, ?., & Riiska, W. O. (2018). On the Effectiveness of Central Bank Intervention in the Foreign Exchange Market: The Case of Slovakia, 1999–2007. Comparative Economic Studies, 60(3), 442-474.
https://doi.org/10.1057/s41294-017-0039-z
Blanchard, O., & Adler, G. (2015). Can Foreign Exchange Intervention Stem Exchange Rate Pressures from Global Capital Flow Shocks? (No. w21427). National Bureau of Economic Research.
Bordo, M. D., Humpage, O. F., & Schwartz, A. J. (2016). On the evolution of US foreign-exchange-market intervention: thesis, theory, and institutions. In Strained Relations: US Foreign-Exchange Operations and Monetary Policy in the Twentieth Century (pp. 1-26). University of Chicago Press.
Domanski, D., Kohlscheen, E., & Moreno, R. (2016). Foreign exchange market intervention in EMEs: what has changed?.
Fratzscher, M., Gloede, O., Menkhoff, L., Sarno, L., & Stöhr, T. (2017). When is foreign exchange intervention effective? Evidence from 33 countries.
Ghosh, A. R., Ostry, J. D., & Chamon, M. (2016). Two targets, two instruments: monetary and exchange rate policies in emerging market economies. Journal of International Money and Finance, 60, 172-196.
Hodrick, R. (2014). The empirical evidence on the efficiency of forward and futures foreign exchange markets. Routledge.
Moreno, R. (2011). Foreign exchange market intervention in EMEs: implications for central banks. BIS Papers, 57, 65-86.
Newman, V., Potter, C., & Wright, M. (2011). Foreign exchange market intervention. RBA Bulletin, December, 67-76.
Trivedi, S. R., & Srinivasan, B. (2016). Impact of Central Bank Intervention in the Foreign Exchange Market: Evidence from India Using an Event Study Approach. Economic Papers: A journal of applied economics and policy, 35(4), 389-402.
Wang, Y., Li, X., Li, Y., & Liu, M. (2015). A Study on Asymmetric Preference in Foreign Exchange Market Intervention in Emerging Asia.
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