Analysis on Foreign Exchange Intervention in the International Financial Market

AbstractThe United States has ceded to the rest of the world managing the dollar’s value. For a generation, the U.S. authorities have all but withdrawn from the foreign exchange market. Yet the dollar does not float freely as a result of this hands-off U.S. policy. Instead, other authorities manage the dollar exchange rates, albeit separately. These authorities make heavier purchases of dollars in its downswings than in the upswings, damping its decline. Thus, the Fed finds that accommodative monetary policy transmits less to U.S. manufacturing and traded services, and relies on still lower rates to stimulate interest-sensitive housing and auto demand. The current U.S. dollar policy of naming and shaming surplus-running countries accumulating foreign exchange reserves does not seem to work. Three alternatives warrant consideration. First, the U.S. could reinstate its withholding tax on interest income received by non-residents and even add policy criteria to bilateral tax treaties. Second, the U.S. authorities could retaliate by selling dollars against the currencies of dollar-buying jurisdictions running chronic surpluses. However, either the withholding tax or such retaliatory foreign exchange intervention pose huge practical challenges. Third, the U.S. authorities could re-enter the foreign exchange market, making large-scale asset purchases in foreign currency when the dollar rises sharply against its average value. Such a policy would encourage private investment in U.S. traded goods and service production. The challenge is to set ex ante foreign exchange intervention rules to guide market participants’ expectations, even positioning them to do the authorities’ work.

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Foreign Exchange Intervention Rules for Central Banks: A Risk-Based Framework

SSRN Electronic Journal ◽

10.2139/ssrn.3799624 ◽

2021 ◽

Author(s):

Romain Lafarguette ◽

Romain Veyrune

Keyword(s):

Foreign Exchange ◽

Central Banks ◽

Foreign Exchange Intervention

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DOLARIZATION OF THE FINANCIAL MARKET OF UKRAINE: CAUSES, EVOLUTION, CONSEQUENCES

Scientific Notes of Ostroh Academy National University Series Economics ◽

10.25264/2311-5149-2021-21(49)-56-66 ◽

2021 ◽

Vol 1 (21(49)) ◽

pp. 56-66

Author(s):

Ihor Krupka

Keyword(s):

Interest Rates ◽

Financial Market ◽

Foreign Currency ◽

Banking System ◽

Market Potential ◽

National Currency ◽

Foreign Banks ◽

Stable Operation ◽

Negative Consequences ◽

International Financial Market

The purpose of the article is to assess the level of domestic financial market dollarization, find out the causes of this economic phenomenon, trace its evolution and identify current features, substantiate proposals to minimize the negative consequences for the financial market and the economy in general. The methods of theoretical analysis, synthesis and generalization, analysis of statistical data and its graphical interpretation are used in the research. The results of the research showed that the main reasons for dollarization in Ukraine were high inflation and sharp fluctuations in the exchange rate of the national currency. In general, the dollarization of national financial markets occurs through the following channels: 1) borrowing on the international financial market; 2) the entrance of foreign banks to a domestic market; 3) investing abroad, when a national financial market is not sufficiently developed to create high-quality and highly liquid assets, dollarization provides rapid access to foreign financial assets and optimization of the profitability and risk structure of an investment portfolio; 4) the difference (spread) between interest rates in national and foreign currency. Based on the study of the domestic financial market, the following conclusions are made: 1) the level of Ukraine`s financial market dollarization in the aggregate and in terms of its separate segments is high; 2) this level poses a threat to the stable operation of financial intermediaries and the banking system in case of the national currency devaluation; 3) currency imbalance of assets and liabilities in the banking system has strongly decreased since 2008, but is still significant; 4) foreign currency is widely used by economic agents in the shadow sector of the economy. We consider the current dollarization level dangerous for the development of the country's financial system, and its reduction to a scientifically sound natural level should become one of the main tasks of the National Bank of Ukraine. Achieving the natural dollarization level and effective use of the domestic financial market potential will allow to intensify Ukraine's national economy development and promote integration into the international financial market and the global financial space.

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