17. Exchange (Currency) Market Intervention (Ch12)

Principles of Macroeconomics (with Xtra!)

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T he Canadian dollar, like the currencies of most industrialized nations, operates on the basis of a floating exchange rate, which means the price of a Canadian dollar fluctuates according to market conditions. Periods of volatility in the exchange rate can arise and the Bank of Canada may intervene in the foreign exchange markets on behalf of the federal government to counter disruptive movements in the price of the Canadian dollar. Foreign exchange market intervention is conducted using the federal government’s holdings of foreign currencies that are held in the Exchange Fund Account. The fund holds foreign reserves such as U.S. dollars, Japanese yen, European euros, as well as other assets like Special Drawing Rights (SDRs) at the International Monetary Fund (IMF), and gold. Every week, statistics are published by the Bank showing changes in the level of reserves in the fund. The Bank acts as an agent of the government when it buys and sells foreign exchange reserves. The currencies that are purchased
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