Intervention and Trading – Methods that Move the Forex Market
In a free floating exchange rate system, the rate is determined purely by supply and demand forces of the market. However, there are times that the central bank intervenes to raise or lower the exchange rate in the floating market. The central banks are often influenced by outside sources to take part in this type of market manipulation. There are many reasons behind this intervention by the central bank.
The main reason that the central bank practices intervention is to stabilize fluctuations in the exchange rate. It is harder to make international trading and investment decisions if the exchange rate is constantly moving. If a trader feels less confident about the stability of the exchange rate they will reduce their investment activities.. For this reason investors will often place pressure on the government or central bank to intervene if the exchange rate is moving too much.