Government Interventions And Forex by Abe Cofnas

Government Interventions And Forex by Abe Cofnas

The forex trader needs to realize that the currency markets are influenced and sometimes even directly  manipulated by governments.  The prospects of government intervention to strengthen or weaken a currency are real.   Intervention is most likely when currency prices reach extremes in value.  When a currency is too strong it threatens economic growth by making a country’s exports more expensive. Countries often depend on exports to increase their economic growth.  When a currency is too weak it creates a potential for inflation and an increase in interest rates.  In either case extremes are what bothers governments.    There are examples of both kinds of interventions occurring.  Intervention is defined when there is official purchase or sales of currencies through a central bank.

The forex trader needs to realize that the currency markets are influenced and sometimes even directly  manipulated by governments.  The prospects of government intervention to strengthen or weaken a currency are real.   Intervention is most likely when currency prices reach extremes in value.  When a currency is too strong it threatens economic growth by making a country’s exports more expensive. Countries often depend on exports to increase their economic growth.  When a currency is too weak it creates a potential for inflation and an increase in interest rates.  In either case extremes are what bothers governments.    There are examples of both kinds of interventions occurring.  Intervention is defined when there is official purchase or sales of currencies through a central bank.

This group of Finance Ministers of 7(also now called the G8 because Russia joined) nations provides very useful information about global economic events and sentiment regarding the forex markets. When the G7 meet they issue a statement that provides an authoritative overview of the status of the world economy and also contains very carefully phrased language designed to impact the currency markets. The forex market waits for these announcements  

More recently another group called the G20 have become important in regard to currency markets.  The G20 represent  the finance ministers of the following countries:

Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, the United States and the European Union.

It was formed in 1999 and may become an important player in forming strategies for improving the global economy. In 2004 the G20 met and agreed to reduce IRAQ debt significantly.  The Forex trader should monitor the meetings and documents of this group.  A good way to keep on top of G20 meetings are www.g7.utoronto.ca/g20/g20backgrounder.htm

Examples of Key Government Interventions in Currencies

JUNE 1998 -US BUYS YEN

During the week of June 12-19th The U.S. intervened to buy yen.  The Japanese economy was in a very deep recession causing huge lack of confidence in the yen.  If the yen kept falling, the Japanese auto manufacturers would be able to export more autos thereby threatening the U.S. auto industry.  There was also fear that a weaker yen would cause China to devalue its currency.  The interesting historical note to keep in mind is that in 1998 the impact of China on the currency markets was, for the first time in history, a major topic at the G7 meetings.