The influence of central banks' interventions on the level and Essay

The influence of central banks' interventions on the level and volatility of foreign exchange rate - Essay Example Furthermore, in a number of nations the central bank is essentially responsible for determination of the foreign exchange rate. The exchange rate volatility took prominent shape since the collapse of the Bretton Wood fixed exchange rate system (Galati and Melick, 2002). Since exchange rate plays an important role in supporting international trade, its volatility is seen as a hindrance. Therefore, central banks often make strong effort for minimising the volatility or it’s after effect on business. However, there are several analyses which suggest that central bank’s intervention tend to increase volatility of foreign exchange market while the bank tends to witness losses while managing the volatility. The paper assesses the impact of the central bank intervention on volatility of exchange rate. Meanwhile, various relevant factors such as types of exchange rate systems, potential scope of resource wastage and intended and unwanted impact of intervention policies have been discussed briefly. The foreign exchange market is the prevalent financial market across the globe. Foreign exchange trading is referred to transacting of one currency in exchange of others. Trading of currencies generally takes place in the form of bank transfers and bank deposit. Except for tourism and physical purchases, physical transfer and exchange of currencies rarely happens. The exchange rate system is an imperative characteristic of foreign exchange market and that of the global economic policy. Based on conventional models, exchange rate system can be classified as fixed exchange rate and floating exchange rate. Fixed exchange rate, which is also known as pegged exchange rate, is referred to the arrangement of price determination where rate of one currency (national currency) with respect to other foreign currencies is kept fixed by means of government intervention. Fixed exchange rate has been considered favourable when two or more countries experience similar