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Currency controls

Currency markets as a rule are not and hardly ever are free and unregulated. Governments and central banks around the world are far too cautious and risk aware to allow the value of their currency to be left to the often fickle devices of free-market valuation. (Remember that central banks and local governments are more focused on controlling local inflation and interest rate levels than keeping foreign exchange dealers happy!) For that reason quite often prescriptive and quantitative controls are imposed on national currency transactions and holdings, be it by local citizens or foreigners.

Hardly any country has a free-floating currency. In the Asian region for instance, the Hong Kong dollar continues to operate under a linked exchange rate system in which the Hong Kong Monetary Authority (HKMA) guarantees that it will exchange HKD for USD, and vice versa, at a rate of 7.80 HKD for each USD. In practice, the HKMA allows the value of USD/HKD to drift within a band of 7.75 to 7.85. Market forces therefore keep prices close to the 7.80 target, as any rise above will see local banks handing in their HKD in exchange for USD, leading to a reduced supply of HKD and a fall in the USD/HKD rate (as the HKD firms). By contrast, a slip below 7.80 will encourage local banks to exchange USD for HKD, resulting in a greater supply of HKD an....


  

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