Reading 20?Currency Exchange Rates
2. The Foreign Exchange Market
2.2. Market Participants
4. Exchange Rate Regimes
4.3. A Taxonomy of Currency Regimes
4.3.3. Fixed Parity
Central banks: These entities sometimes intervene in FX markets in order to influence either the level or trend in the domestic exchange rate. This often occurs when the central banks judge their domestic currency to be too weak and when the exchange rate has overshot any concept of equilibrium level (e.g., because of a speculative attack) to the degree that the exchange rate no longer reflects underlying economic fundamentals. Alternatively, central banks also intervene when the FX market has become so erratic and dysfunctional that end-users such as corporations can no longer transact necessary FX business. Conversely, sometimes central banks intervene when they believe that their domestic currency has become too strong, to the point that it undercuts that country’s export competitiveness. The Bank of Japan intervened against yen strength versus the US dollar in 2004 and again in September 2010. Similarly, in 2010 the Swiss National Bank intervened against strength in the Swiss franc versus the euro by selling the Swiss franc on the euro–Swiss (CHF/EUR) cross-rate. Central bank reserve managers are also frequent participants in FX markets in order to manage their country’s FX reserves. In this context, they act much like real money investment funds—although generally with a cautious, conservative mandate to safeguard the value of their country’s foreign exchange reserves. The foreign exchange reserves of some countries are enormous (e.g., China has about USD2.5 trillion in reserves as of 2010), and central bank participation in FX markets can sometimes have a material impact on exchange rates even when these reserve managers are not intervening for public policy purposes.