Context
The United States and Japan have reaffirmed their commitment to cooperate in stabilising the foreign exchange market after the Japanese yen weakened sharply against the US dollar.
Explanation
- A country’s currency exchange rate is the value of its currency relative to another; it may be market-determined or influenced through central bank intervention.
- Currency intervention involves a central bank buying or selling its own or foreign currency in the foreign exchange (Forex) market to reduce excessive volatility.
- A stronger yen can reduce carry trade, where investors borrow at low interest rates in Japan and invest in higher-yielding assets abroad, affecting global capital flows.
- Exchange rate movements influence exports, imports, inflation, foreign investment and external debt servicing.
- In India, the Reserve Bank of India (RBI) manages exchange rate volatility without targeting a fixed exchange rate under a managed float regime.
- The coordinated intervention has implications for global capital flows, emerging markets and India’s financial markets.
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