Foreign Exchange Intervention in EMEs

Running head: FOREIGN EXCHANGE INTERVENTION IN EMEs 1
Foreign Exchange Intervention in EMEs
Name
Institution

FOREIGN EXCHANGE INTERVENTION IN EMEs
2
Introduction
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.
Foreign exchange Intervention in the financial market
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

FOREIGN EXCHANGE INTERVENTION IN EMEs
3
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.
Purpose of the foreign exchange markets
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