Major Central Banks in the World
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Central banks play a very important role in the world of foreign currency exchange. Without central banks, trading currencies between countries would be extremely difficult to do. There are eight central banks that play a vital role in the world of currency exchange.
The United States Federal Reserve System, or the Fed, is one major central bank being that the dollar is involved in about 90% of all transactions related to currency. The Fed decides on the interest rates of the dollar. The Fed is managed by a group that consists of seven governors from the Federal Reserve Board and five presidents of reserve banks. The rest of the eight central banks are the European Central Bank, Bank of England, Bank of Japan, Swiss National Bank, Bank of Canada, Reserve Bank of Manila, and the Reserve Bank of New Zealand.
For most of these central banks, inflation target is very important. Inflation is usually measured by the Consumer Price Index. If inflation becomes higher than a central bank’s goal, then most likely it will steer toward a more tight policy on money. If inflation falls below a central bank’s goal, the central bank will have a more loose monetary policy. Combining the monetary policies of two central banks is a stable way of predicting the movement of a currency pair. For instance, if a particular central bank raises interest rates, while its partner central bank is at a status quo, then the currency pair can be expected to move to an interest rate increase.
To be a successful and effective trader, it is important to be knowledgeable about the different central banks’ mandate, power players and structure. Knowing these things will enable a trader to predict the movements of each of these central banks with better accuracy.