Question: How Does the Government Regulate Exchange Rates?
Answer: Since dollar exchange rates are set on the open market, the Government can only indirectly impact exchange rates. (In countries, like China, where the rate is fixed, the government can directly change the rate.) The most direct way is by raising the Fed Funds Rate, which increases interest rates throughout the banking system, reduces the supply of money, and makes the dollar stronger relative to other currencies. If the Fed lowers the Funds rate, then of course the opposite occurs, and the dollar becomes weaker.
The Treasury Department can also print more money, which increases the supply, weakening the dollar. It can also borrow more money from other countries, known as selling Treasury notes. This not only increases the supply of money, but it also increases the debt...both of which weaken the dollar.
Exchange Rates FAQ
- What Are Exchange Rates?
- How Do Exchange Rates Work?
- How Does the Government Regulate Exchange Rates?
- How Do Exchange Rates Affect My Personal Finances?
- How Can I Protect My Personal Finances From the Impact of Exchange Rates?
