is estimated that some $2 trillion dollars in United States
currency change hands on a daily basis on the international
foreign exchange markets. Now the world doesnt work
with US dollars alone, so trade requires that different
currencies be valued in terms of the currencies of different
In the international financial arena, the value of currency
alters from day to day against the currencies of trading
partners. The foreign exchange rate or simply the exchange
rate, places a value for the currency of one country, relative
to that of another country. For example, what is the value
of one TT dollar in terms of the Canadian dollar.
Many people are still confused by the terms buying rate
and selling rate. In general these rates are published on
boards in banking and financial institutions and in the
The rates are quoted from the perspective of the bank or
institution. It is as though the bank is buying from the
customer or selling to the customer. It is never the customer
selling to the bank. Normally the bank will buy a foreign
currency from the customer at a rate lower than it will
sell the same currency to another customer.
Last week, we noted that monetary policy uses tools such
as the exchange rate and the managed float, in order to
further its aims and objectives.
Limit foreign exchange
A managed float refers to the fact that the central bank
has the ability to intervene when exchange rates drop below
a certain level or vice versa. The Central Bank intervenes
in order to bring the level back to a predetermined rate
of exchange. The managed rate is never really made known
to the public.
The opposite of this is a free floating dollar. This means
the currency exchange rate is constantly changing according
to forces of supply and demand. Demand is fuelled either
by an increase in the amount of transactions, or as a result
of speculation. Speculation increases when interest rates
in the foreign currency are getting higher, but it is not
limited to that factor alone.
The majority of governments intervene in the exchange rate,
so as to avoid untoward pricing effects in the market. Some
types of interventions are called pegged. This means that
the floating currency is maintained within a plus or minus
one range in relation to a named foreign currency.
Sterilisation is a strategy to insulate the local currency
from the changes occurring in the foreign exchange currency
market. In its simple form, the amount of local currency
available for exchange is limited, thus leading to an inability
to participate on the foreign exchange market.
One must remember too, that these measures are never in
isolation. They tend to work alongside other policy measures
to create a desired result.
It is not so important to know what all these terms mean,
as it is important to recognise that the variables can be
manipulated. In this recognition, individuals will come
to value their own ability to influence the variables in
their own savings plans to create desirable yields.
week we look at individual variables.