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The Foreign Exchange Matrix: A new framework for understanding currency movements by Barbara Rockefeller, Vicki Schmelzer

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Chapter 12 – The Central Bank Tool Kit and How it Affects Foreign Exchange

“Banking establishments are more dangerous than standing armies.”

Thomas Jefferson

In earlier chapters, we say that to the FX trader, the central bank is the single most important institution. The trader studies economic and other data specifically to get an understanding on how it may affect the central bank’s policy stance. Until recently, world central banks adhered to tried and true methods of implementing monetary policy. This involved raising and lowering benchmark interest rates, using open market operations to adjust liquidity, and in some cases providing domestic banks with a discount window to borrow from. Occasionally, a central bank would adjust reserve ...

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