hr: Currency

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Most countries in the world have Central banks. While these central banks may have several responsibilities, their man duty is to encourage and maintain monetary and financial stability. This is often done by creating monetary or economic policies in support of their respective countries’ economic agenda.

Key functions of a Central Bank

* Management of the monetary policy - this includes management of issuance of currency and management of inflation;
* Management of the credit system in the economy - A Central Bank acts as banker to commercial banks. It refinances their debt at the prevailing discount rates.

Central Banks are also clearing houses for commercial banks, and in times of extreme economic slowdown, may act as a lender of the last resort. This role then as a lender of last resort will be very much appreciated when commercial banks face a sudden credit crunch or when they are at the brink of insolvency. Another key role of the central bank is to restore confidence in the financial system of the country through bailout packages for commercial banks.

So how to central bank actions affect the forex trader?

Central bank actions are vital in knowing the value of currencies. The central bank’s strategies and its use of various monetary management tools, have very strong impact on the exchange rate of a country’s currency. When the Central Bank causes excess money to circulate, this can lead to inflationary tendencies, since it will cause the local currency to lose much of its value. If the central bank adopts a tight monetary policy, then this will most certainly result in what is called a liquidity squeeze and will exert an upward pressure on interest rates. Higher the interest rates the more investments the economy will attract, and with it pushing the value of the local currency upwards.

The central bank instills confidence in the country’s economy. If a financial system is stable, it means that the local currency is also stable.

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