Central banks influence currency values through monetary policy from "summary" of International Money and Finance by Michael Melvin
Central banks play a crucial role in determining the value of a country's currency through their monetary policy decisions. By adjusting interest rates, engaging in open market operations, and implementing quantitative easing measures, central banks can influence the supply of money in the economy and ultimately impact the value of the currency. When a central bank decides to raise interest rates, it makes holding that currency more attractive to investors, as they can earn higher returns on their investments. This increased demand for the currency can lead to an appreciation in its value relative to other currencies in the foreign exchange market. Conversely, if a central bank lowers interest rates, it can make holding that currency less attractive, as investors can earn lower returns. This decreased demand for the currency can result in a depreciation in its value compared to other currencies. In addition to interest rate decisions, central banks can also influence currency values through open market operations. By buying or selling government securities, central banks can increase or decrease the money supply in the economy, which in turn can impact the value of the currency. Furthermore, central banks may implement quantitative easing measures to stimulate the economy by increasing the money supply. This can lead to a depreciation in the currency's value as a result of inflationary pressures.- Central banks have significant power to influence currency values through their monetary policy decisions. By carefully considering the economic conditions and objectives of the country, central banks can effectively manage the value of the currency to support economic growth and stability.
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