Central banks are essential to economic management, as they influence exchange rates and maintain financial system stability. Their actions affect not only domestic stability but also have a significant impact on international markets. The impact of Central Banks on Forex markets can be seen in various ways, from setting interest rates to conducting currency interventions. Through these mechanisms, they play a pivotal role in regulating exchange rates, which ultimately shapes the global financial landscape. Here we explore four main aspects of their role in exchange rate regulation.

Monetary policy and exchange rates

Central bank monetary policy is one of the main tools for regulating exchange rates. Changes in the interest rate affect the attractiveness of a nation's currency to investors. When the central bank raises the rate, it makes investments in that currency more attractive because of the increased yield. As a result, increased demand for the currency leads to its appreciation. Conversely, lowering the interest rate makes the currency less attractive and its exchange rate tends to fall.

Currency interventions

Currency intervention is the direct intervention of a central bank in the foreign exchange market to control the exchange rate of its national currency. It may be the sale or purchase of its own currency to achieve a desired exchange rate level. Interventions can be aimed at protecting the economy from excessive strengthening or weakening of the currency. For example, if the currency strengthens strongly, this can negatively affect exporters, making their goods less competitive in the world market. The central bank can sell some of its currency reserves to weaken its exchange rate and support exporters.

China often resorts to currency intervention to maintain a favourable RMB exchange rate, which helps Chinese products remain competitive in international markets. Currency interventions are usually short-term and depend on the level of bank reserves. However, even short-term interventions can have a noticeable impact on market expectations and exchange rate movements.

Management of foreign exchange reserves

Central banks accumulate foreign exchange reserves - stocks of foreign currencies, gold and other assets that are used to stabilise the national currency. These reserves can be used to support the exchange rate in times of crisis or instability. For example, if a currency is under pressure from speculators, a bank may use reserves to buy back its currency, thereby reducing its supply and maintaining the exchange rate.

Conclusion

Central banks play an indispensable role in regulating exchange rates by influencing them through monetary policy, foreign exchange intervention and reserve management. These actions ensure the stability of the economy, maintain competitiveness in international markets and protect the domestic market from sharp fluctuations in the exchange rate. Effective exchange rate management reduces inflation risks and supports economic development. In the context of globalisation, the role of central banks in foreign exchange markets remains important, as their actions have significant implications for the world economy and financial stability.