Behind the majors

Behind each of the major currencies stands a government and central bank. These official entities have policies and take stances that influence how their nations’ currencies move in the forex trading market.

The United States
The U.S. Federal Reserve has earned its status as one of the most respected of the national central banks, proving themselves realistic and innovative as they utilised such unusual tools as quantitative easing to prop up the U.S. financial system during the worst of the global financial crisis. As well, the Fed has proven their credibility. If they announce that interest rates will remain extraordinarily low “for an extended period of time,” the forex trading market notes and believes that stance.

The U.S. Treasury Department, on the other hand, has damaged their credibility through the stance taken on the Chinese yuan, at first labelling China a “currency manipulator” and then backtracking on that stance. Although the Treasury repeats the mantra that a “strong U.S. dollar” is their priority, too often the rhetoric is not backed by government action.

The Eurozone
The European Central Bank (ECB) was formed around the central banks of the Eurozone’s member nations, with the old Deutschebank at its core. The German central bank remembers the hyperinflation of the 1920s with chilling clarity, and therefore the ECB maintains inflation targeting as its primary goal. The poorly-timed interest rate increase in July 2008 is an example of this.

Running a poor second place behind inflation targeting in the ECB’s mandate is currency stability. As the Eurozone remains heavily dependent upon exports, the ECB tends to talk down the Euro when it appreciates too much against the currencies of its major trading partners, a tactic known as “verbal intervention.”

Japan
Because Japan is another nation that relies heavily on exports, the yen is one of the most political of the major currencies. The Ministry of Finance (MoF) often comments on currency movements and fluctuations, particularly when the yen is strong or volatility is high, in an attempt at verbal intervention. During the global financial crisis, the MoF provided high and sometimes low entertainment, issuing official and unofficial comments practically by the hour, a number of them contradictory.

Although in the 1980s and 1990s the Bank of Japan was known to intervene directly in the forex trading market to weaken the yen, as of late they’ve shown more subtlety. Recent intervention has become less common and is managed through various quasi-governmental bodies such as the postal workers’ pension fund.