If you are like many investors, you may not completely understand how the FED influences currencies. This does not mean that it is impossible to learn this fairly quickly and easily, without hours of confusion. The FED, formally known as the Federal Reserve System and sometimes also referred to as the Federal Reserve, has a lot of influence on currencies, and not just those in America but also those all around the globe. This system was first started by Congress through an official act called the Federal Reserve Act, in the year 1913. This act sets the monetary policy, and allows the FED to become the last chance lender if needed, so that the flow of finances in the United States is not completely stopped or substantially slowed. This is done by allowing the Federal Reserve System to become a lender when banks and other financial institutions need more liquidity to prevent them from collapsing.
The FED has regulation and control over the amount of money that is in the American and global economy at any given time. This allows for manipulation to control inflation and deflation, and to keep the economy stable. One way this is done is through the use of Treasury bonds. If a recession occurs the Fed will purchase US Treasury bonds off of the open market, and this makes the economy more liquid and causes expansion. If inflation becomes a problem then treasury bonds are sold instead, causing the economy to contract. This is not the only way that the Federal Reserve System influences currencies either.
Another influence that the FED has on currencies concerns the international markets for the US dollar, and the foreign exchange markets, also known as Forex. The value of the American dollar is influenced by the FED when it is compared to foreign currencies, in an attempt to make disorderly market conditions more stable and less volatile. The FED will either cause the dollar to become strengthened or undervalued. If the FED believes that the dollar is too strong when paired against foreign currencies, it will sell the currency to cause it to become weaker when compared to foreign currencies instead. If the opposite is true, and the dollar is considered too weak, the Federal Reserve System will buy the dollar to strengthen it and increase demand.
The FED controls the interest rates, and this has a big impact on the international demand for this currency against foreign currencies. Being able to influence the interest and inflation rates, as well as controlling the stability of the economy and the amount of American currency in circulation, means that the Federal Reserve System is in the position to cause market movements due to their influence on market and economic factors. Any change in the inflation rate or the amount of money in circulation, whether this change is positive or negative, can have a big impact on currencies around the globe. The FED has enormous influence over currencies, but this influence is used very carefully and cautiously because of the profound global effect it can have.
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