All types of banks, including commercial, investment, and central, play a significant role in foreign exchange (forex) markets. While other banks such as the columbia bank sayreville, do impact the forex activities, central banks are the major players.
Commercial banks can dramatically affect the bid and ask prices by trading at a sublime level. However, the role of central banks is definitely higher than this. Here are the roles of central banks in forex markets.
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Management of Reserves
Every country needs to have a certain level of foreign currency reserve. If this amount goes lower or higher than the required standard, the central bank of that country will get to the action. It will buy or sell foreign currency, which can directly affect the currency value in the forex market.
Central banks also use this method to stabilize their value in the global market. Doing this can help them avoid devaluation or overvaluation of their respective currencies.
Central banks may directly or indirectly control the forex market. The Federal Reserve Bank regulates the currency flow and interest rate, indirectly yet significantly impacting the forex market. That is so because the US dollar is included in the maximum number of trades around the world.
Forex traders make their investments depending upon the increase or decrease of interest rates by the central bank. If traders perceive that the central bank will cause a rise in the rates, they will make a large investment. The same goes for the opposite scenario.
Due to their impact on the foreign exchange of currencies, the following banks play the most significant role in forex markets.
- The Federal Reserve
- European Central Bank
- The Bank of England
- The Bank of Japan
- The Bank of Canada
- The Swiss National Bank
Along with multiple other duties, central banks have a huge responsibility of maintaining the foreign reserve of the country. While commercial banks do have a considerable impact on forex, the six large central banks affect the foreign exchange at the global level.