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¶ … firm's finance team aspect international finance lead a discussion team. This briefing important global financial crisis began 2007. The briefing needed provide foundation finance team versed international aspects finance.
Describe when and why central banks buy either their own currency or the currency of another nation in an effort to control exchange rates.
A central bank can influence the value of its national currency by raising or lowering interest rates, thereby encouraging borrowing and spending by other banks, businesses, and consumers. It can also affect other nations' currency values by buying or selling its reserves of another nation's currency, thereby raising or lowering the value of that currency. A central bank may wish to depreciate its own currency by selling it on the open market to encourage foreign investment and tourism or to encourage purchase of its exported goods abroad (Floating vs. fixed exchanges, 2011, CMSFX). However, a currency that is worth less also means that it is more expensive for residents of the home nation to buy goods and services abroad and to travel, when they exchange their money for the native currency.
What did the central banks do to stabilize the financial systems in 2007 -- 2009?
To stabilize the failing U.S. economy, the Federal Reserve drastically...
This was intended discourage saving and encourage borrowing by consumers and businesses and also to liberalize financial policy for banks wary of extending even short-term loans necessary for regular transactions. It increased its infusion of cash into the economy sharply as well. Other banks worldwide pursued similar policies. "The Bank of England base rate at the beginning of the financial crisis was 5.75%. Its discount rate was 1% higher. The Fed funds rate was 5.25% and its discount rate was 0.5% higher. The ECB rate was 4%, with a more variable discount usually up to 1% higher. The Fed took a more aggressive approach to cutting interest rates in 2007. It cut twice at regular FOMC meetings on 18 September and 11 December" (Morgan 2009). In contrast, the European Central Bank, fearing rising inflation rates, did not slash interest rates as drastically. This has made it more difficult for the EU countries that were hardest-hit by the crisis, such as Ireland and Greece, given that they cannot lower the value of their currency to bring in foreign dollars and tourism and deal with their debt and cannot infuse cash to stimulate their economies (Baker 2011). And the Bank of England "was notably more reluctant than the Fed or ECB to adopt loosened liquidity policies for commercial banks" (Morgan 2011).
In an…
References
Baker, Dean. (2011). The European Central Bank. Business Insider.
Retrieved August 7, 2011 at http://www.businessinsider.com/the-european-central-bank-the-main-cause-of-the-debt-crisis-2011-8
Floating vs. fixed exchanges. (2011). CMSFX. Retrieved August 7, 2011 at http://www.cmsfx.com/en/forex-education/online-forex-course/chapter-2-fundamental-factors/exchange-rates-supply-and-demand/central-banks/
Market plunge will get worse unless European Central Bank buys Italian debt. (2011).
The Telegraph. Retrieved August 7, 2011 at http://www.telegraph.co.uk/finance/financialcrisis/8686634/Financial-crisis-market-plunge-will-get-worse-unless-European-Central-Bank-buys-Italian-debt.html
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