Page 6 - Module 4 - Lesson 4 - Guidelines to the iEvents that effect the USD
P. 6
how does the INFLUENCES
government regulate
exchange rates
The government regulates exchange The Treasury Department is a
rates only indirectly. That’s because government agency that also indirectly
most exchange rates are set on the open affects the exchange rate. It prints more
foreign exchange market. In countries money, which increases the supply,
like China, where the rate is fixed, the weakening the dollar.
government directly changes the rate.
To find out exactly how this is done, see It can also borrow more money from
How Does China Affect the U.S. Dollar? other countries. That’s done by selling
Treasury notes. That not only increases
The U.S. government has various tools to the supply of money, it also increases
influence the U.S. dollar exchange rate the debt. Both will send the dollar’s
against foreign currencies. value down.
An independent arm of the government The third government tool is expansionary
is the nation’s central bank, the Federal fiscal policies. They weaken the dollar by
Reserve. It indirectly changes exchanges increasing the money supply.
rates when it raises or lowers the fed
funds rate. But these policies can also improve
economic growth. That often makes
For example, if it lowers the rate, that investors demand more dollars as a safe
drives down interest rates throughout haven. It’s like a vote of confidence in
the U.S. banking system. It also reduces the economy.
the supply of money.
Sometimes this demand is so high that
Both of those make the dollar stronger investors overlook the low interest rate
relative to other currencies. That’s they are getting by investing in dollars
because U.S. dollar-denominated credit or U.S. Treasurys. The demand is even
has become more expensive. greater than the expansion in supply of
dollars. For more, see 3 Ways to Measure
At the same time, dollar-denominated the Value of the Dollar.
assets generate a higher return. Both
create more demand for the dollar, while Although the government is powerful in
taking it out of circulation. influencing exchange rates, it is still forex
trading that actually changes them.
The laws of demand and supply tell you
that less supply and more demand drives
up the price. When that happens to the
dollar, it can purchase more foreign
currency on forex markets.
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