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,...
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