Markets - Foreign exchange market

Introduction

A country's foreign exchange reserves are typically managed by the central bank. In the Bank of England manages these reserves on behalf of the government. In the past, the Bank of England has at various times intervened in the foreign exchange market to try to influence the level of the exchange rate. This is still an option, though has rarely been done in recent years. The resources in this section look at how the foreign exchange market works, and the possible ways it could be influenced.

• Explanation - a good starting point for finding out about the foreign exchange market. A simple overall guide.
• Theories - more detail on all the theories about exchange rates. The determination of exchange rates, fixed and floating exchange rates, the effects of exchange rate changes and the way in which intervention works.
• Worksheets - some worksheets to help you test your understanding of the foreign exchange market.
• Further work - some suggestions for other areas of economic theory you may want to look at when assessing foreign exchange markets.

Note to users of the Virtual US Bank of Biz/ed: Because of the importance of London to currency exchange, this section is developed using the point of view of the United Kingdom and the Bank of England. However the US Federal Reserve has many of the same concerns about currency exchange rates and the effect on the dollar. In addition the same kinds of issues apply to the US economy. For more on the US Federal Reserve and currency exchange, see www.ny.frb.org/markets/foreignex.html.