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Governments

Governments, for obvious reasons, have an enormous stake in what occurs in the foreign exchange markets. A currency is not just something people use to exchange goods; it is a symbol of national pride and power. One journalist compared it to a national flag. When a currency comes under pressure or is forced to be devalued, it can be humiliating to the government. It is an admission to the entire world of its own incompetence, impotence, or both. Governments that devalue often don't outlast the civil unrest they spark.

Governments have various tools at their disposal to control currencies. Many of them are ineffective, especially if the market has a strong opinion one way or the other about a currency's value. Still, governments often try to “talk up” (or down) a currency by stating their displeasure over the currency's value or by hinting at various measures they will take to move it. These statements can influence a currency, especially in the short term.


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