Explain why many industrialized countries do not often intervene in the foreign exchange market.

Most industrialized countries are disinclined to interfere in the foreign exchange market because they don’t want to undercut confidence in their respective currency. More so, industrialized countries have robust private markets that can handle the volatility of the foreign exchange market. Lastly, even when industrialized countries do intervene, the impact is mostly negligible and/or fleeting.

Expert Answers

An illustration of the letter 'A' in a speech bubbles

Before I can help you figure out why industrialized countries might be hesitant to intervene in the foreign exchange market, I think a definition of the foreign exchange market should be established.

The market came to be because of globalization. It helped bring organization to the new, powerful international economy. It provided a space to exchange, buy, and sell currencies across the world. It also made it possible to convert currencies for global trade deals or investment.

As your question acknowledges, most industrialized countries have come to the conclusion that interfering in the market is not worth the trouble. For one thing, the impact is often negligible or fleeting. For another thing, interference can subvert confidence in a country’s monetary policy. Lastly, developed countries tend to possess private financial markets that can handle any volatility that might occur.

Less developed countries don’t tend to have the luxury of strong private markets that can deal with the instability of globalization. To help their countries stay afloat and maintain influence, their governments are more likely to interfere in the foreign exchange market. The foreign exchange market becomes more of a focus for these countries since they tend to have less financial options and resources than developed countries.

Less industrialized countries might interfere in the foreign exchange market to try to ward off inflation, to try and give themselves an advantage over other countries in the market, or to try and weather currency trouble in their own country.

Approved by eNotes Editorial Team

Posted on

Soaring plane image

We’ll help your grades soar

Start your 48-hour free trial and unlock all the summaries, Q&A, and analyses you need to get better grades now.

  • 30,000+ book summaries
  • 20% study tools discount
  • Ad-free content
  • PDF downloads
  • 300,000+ answers
  • 5-star customer support
Start your 48-Hour Free Trial