The foreign exchange market refers to a trading place that engages in foreign exchange transactions and regulates foreign exchange supply and demand internationally. Its function is to trade monetary goods, that is, the currencies of different countries.
Due to international economic exchanges such as trade, investment and tourism, there is always a relationship between monetary income and expenditure. However, different countries have different monetary systems. If you want to pay abroad, you must first buy foreign currency in your own currency. On the other hand, foreign currency payment vouchers received from abroad must also be converted into local currency to circulate in China. In this way, the exchange of domestic currency and foreign currency has occurred.
The exchange rate of two currencies is called exchange rate or exchange rate. Central banks in western countries and China are institutions that implement foreign exchange policies, influence foreign exchange rates and often buy and sell foreign exchange. All commercial banks, banks specializing in foreign exchange business, foreign exchange brokers, importers and exporters, as well as their foreign exchange market suppliers and demanders, are engaged in various cash and forward foreign exchange transactions. All these foreign exchange transactions constitute a country's foreign exchange market.
With China's RMB playing a more important role in the global market, monetary policy makers soon realized the benefits of a relatively stable RMB exchange rate. The current problem is how to keep the RMB exchange rate relatively stable.
China government has taken many measures to stabilize the RMB exchange rate. As the market gradually adapts to the international role of RMB, the China government needs to keep the RMB exchange rate stable for a long time to come.
After years of foreign exchange control, unless the China government takes measures to limit the flow of funds, it is expected that a large amount of private capital will flow out of China for the purpose of diversifying risks. In the United States, more than 10% of the total financial assets are used for overseas investment.
The corresponding figure in China will reach about 15 trillion yuan (more than 2 trillion US dollars). But this does not necessarily mean that there will be a large number of transactions in the international market to buy dollars and euros with RMB. For many years, the China government has stipulated that private enterprises should hand over their US dollars and other currencies to the central bank, which will convert them into RMB.
It is time for the central bank to return a large amount of foreign exchange reserves of private enterprises. The total amount of foreign financial assets held by China is expected to exceed US$ 3 trillion, a large part of which is held by China enterprises and investors. At present, it is still in the primary stage, so it is very convenient for China government to take corresponding measures to manage and limit the floating of RMB.
In any case, once the China government allows RMB to achieve a certain degree of international convertibility, there will be a large number of active RMB transactions in the foreign exchange market. In many countries, foreign exchange transactions may lead to serious fluctuations and sharp changes in the currency exchange rate.
Governments of other countries often adopt policies of intervening in the foreign exchange market, including Japan, Singapore, Switzerland and New Zealand. The European Central Bank also took action in the market, and Hong Kong kept the exchange rate of the Hong Kong dollar fluctuating within a set range through frequent buying or selling. The US government also intervened in the foreign exchange market many times, especially in the 1980s and 1990s.
The dominant factor in the foreign exchange market often comes from the short-term profit-seeking speculation of foreign exchange dealers, rather than the business situation in international trade business, nor are they knowledgeable economists or policy makers. The purpose of traders is to make profits, usually short-term interests. They test the deviation of market price in the exchange rate market and profit from it.
These traders usually try to predict the trend of market prices and bet the corresponding transaction amount. They don't need a solid theoretical foundation to guess the market price trend. As long as their guesses are accurate or consistent with those of other traders, traders can make a profit.
However, because the amount of funds available to foreign exchange dealers is many times higher than the amount of goods and services in actual international trade, policymakers and economists must take the investment behavior of traders into account when studying monetary policy. In order to effectively supervise the foreign exchange market, it is necessary to clearly understand the trading mode of traders and the financial instruments used in their transactions.
Frank Newman, one of the authors of this paper, served as the deputy secretary of the US Treasury during the Clinton administration and experienced the intervention of the foreign exchange market. At that time, the public policy position pursued by the United States believed that a strong dollar policy could ensure the maximization of the interests of the United States and the global economy.
In addition, the Clinton administration made it clear that the high fluctuation of the US dollar exchange rate is destructive and will lead to an unnecessary increase in the cost of international trade.
In the case of market volatility or the depreciation of the US dollar, in order to strengthen the strength of the US dollar, the formulation of American intervention measures makes it as difficult for traders to guess its trend as possible, which makes traders who short the US dollar lose money. All these measures send a signal to the market that shorting the dollar is too risky, because it will be difficult for traders to predict the specific time when the measures to intervene and strengthen the dollar will appear, thus causing huge losses to traders.
In American monetary policy, the intervention is led by the Ministry of Finance, assisted by the Federal Reserve Board of Directors, and the specific intervention measures are implemented by the Federal Reserve Bank. Many experts from the US Treasury and the Federal Reserve are very familiar with the foreign exchange market. Another key element of American monetary intervention mechanism is international cooperation.
When a country tries to intervene in the market to devalue its currency, it can achieve this goal by selling almost unlimited amounts of its own currency and buying other countries' currencies. But when the country tries to realize the appreciation of its currency, the government must use its foreign exchange reserves to trade in the market. Cooperation between countries can greatly strengthen the role of market regulation.
The U.S. Treasury and Federal Reserve cooperated with other finance ministers and central banks to buy dollars, which made traders face a trading environment where strong market supervision led to the overall strength of the dollar. There is no formal agreement between the participants in the currency intervention mechanism, but it is recognized that when other governments ask the United States to participate in similar intervention policies to strengthen its currency exchange rate, the United States needs to seriously consider giving assistance.
After the implementation of such intervention policies, exchange dealers usually wait for a period of time to judge whether the government intervention has ended, so as to resume their trading operation of shorting dollars.
The U.S. government will then look for the next opportunity to coordinate other countries to buy dollars in large quantities when the market is not expected, so that traders who short dollars will suffer a lot again. Usually, after two or three interventions, most traders think that the risk of betting on the decline of the US dollar is too great, the exchange rate of the US dollar tends to be stable, and then the price fluctuation gradually tends to be stable.
In some cases, after a few weeks or months, there will be a new round of traders shorting the dollar price trend, and the US government will also start the next round of strong intervention. The above-mentioned intervention mechanism successfully guided the market, so that the United States largely avoided the sharp depreciation of the US dollar and the fluctuation of the US dollar exchange rate.
At present, the trading volume of RMB is gradually increasing, and the China government has various control tools that can be used to reduce the serious and large fluctuations of the exchange rate and keep the exchange rate within a reasonable range. At present, China has only taken some regulatory measures, and there are still many regulatory measures that can be used. Many countries have successfully implemented similar control measures in the past.