Forex Trading | Central Banks and Government Policies

Central banks and government policies play a huge role in forex trading.  In most cases, they try to stay out of the forex market as much as possible.  Even when their not actively doing forex currency trading, they try to keep their fiscal and monetary policies at a minimum to influence their currencies.

Their primary objective is to keep their economies growing.  Central banks do this through monetary policy by controlling the money supply.  They may do this through interest rate cuts and hikes, through buying government securities to pump money into the system, through announcements and hints at policy actions and sometimes even buying and selling their currency in the forex market.  But on the most part, they try to stay out of it as much as possible, as long as their economy is growing.

Then there are government fiscal policies which also influence the currency market.  A government can control their capital inflows through foreign investment tax policies.  It can also implement policies that will affect their GPD, export industry and domestic consumer spending all of which has an impact on the currency market.  If you want to get into long term forex investing, you need to understand the implications of government policies on the markets.

Sometimes they are more involved than at other times.  This is especially true when there is a recession.  That is what is happening right now.  The US Fed implemented a monetary policy to pump more of the US dollar into the system.  This brought the value of USD down.

This also had a cascading effect on the rest of the world.  This action by the Fed caused other foreign currencies to rise in value.

For emerging markets in particular, they saw massive capital inflows.  They had to eventually put in foreign investment tax policies to slow it down.  The capital inflows caused their currency to rise, which also causes their export costs to rise, all of which is bad for their economy.

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