The Manipulation Of Foreign Exchange Rates
Before beginning this article, it should be noted that the International Monetary Fund (IMF) does not approve of its members manipulating foreign exchange rates in order to gain a competitive advantage on the Forex market.
Manipulations of the different Forex exchange rates must not be confused with the daily fluctuations in exchange rates as manipulation is a deliberate act by a certain country in order to gain an advantage over their rival traders. A normal fluctuation is an unconscious change based on economic outlooks and investor behaviours.
What is this manipulation of foreign exchange rates?
As is stated, the IMF does not approve of the manipulation of any exchange rates within the Forex or any other investment markets. By behaving in this manner the trader is gaining an unfair favoured position over the other traders in the industry, and as such will experience a greater amount of profitable trades. Engaging in any form of manipulation has been deemed as an entity or country intervening in the markets over a prolonged period of time through one specific currency, in one specific direction.
Over the past few years, the IMF has identified several countries who they believe have been manipulating currencies for an unfair position. The evidence of this lays within the different countries foreign exchange reserves, and a percentage of the different foreign exchange reserves which are help and compared to total imports.
When the IMF identifies a country for exchange rate manipulation, they look at whether or not the country is buying large quantities of foreign currency, especially the more frequently traded currencies such as the US dollar and Japanese Yen. This sudden increase in currency will affect the exchange rate and may cause a ‘red flag’ directed at that particular trader.
Another reason the IMF may suspect a country of manipulating the foreign exchange rates is through the testing of a payment balance. If a country moves their external accounts back into balance after a large loss has been suffered, this may indicate the possibility of currency exchange rates manipulation.
Do manipulated foreign exchange rates affect the foreign exchange market?
The tradition fluctuation of exchange rates does have a great influence on the foreign exchange rate, both short-term and long-term. So, can it be said that the manipulated foreign exchange rates have the same effect? The answer is rather complicated as it is very difficult to determine.
Based on economic technical analysis of patterns and trends within the Forex market, it can be seen that manipulation of the currency exchange rates can have an effect on short-term trades. This can be based on the fact that within a certain day the manipulated currency will be directed in a certain movement and highly beneficial to one trader. However, this trend will be brief as the markets are extremely volatile and fluctuations tend to be persistent and a manipulated currency must not draw attention. The influence on trades over a prolonged period of time is more uncertain.