The Role of Foreign Exchange Intervention in Emerging Markets (EMEs)

This essay provides a comprehensive analysis of foreign exchange intervention in emerging markets (EMEs). It discusses the purpose of foreign exchange markets, including currency hedging, conversion, speculation, and arbitrage. The essay highlights the increasing activity of emerging markets in foreign affairs post the 2008 financial crisis and their focus on financial stability through foreign exchange interventions. It evaluates perspectives, including Trump's views on currency manipulation, and concludes that while intervention can stabilize markets, free flow of currency interactions is crucial. The document emphasizes the technological advancements in emerging markets and the need for balanced trade policies, with the complete essay and related resources available on Desklib for further study and research.

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

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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

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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

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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

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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.
Evaluations
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

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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

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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.

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References
Banerjee, B., Zeman, J., Ódor, Ľ., & Riiska, W. O. (2018). On the Effectiveness of Central Bank
Intervention in the Foreign Exchange Market: The Case of Slovakia, 1999–2007.
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Bordo, M. D., Humpage, O. F., & Schwartz, A. J. (2016). On the evolution of US foreign-
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Fratzscher, M., Gloede, O., Menkhoff, L., Sarno, L., & Stöhr, T. (2017). When is foreign
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