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And that would be wrong. Any government and central bank that so desires can control the speculators. As the Swiss are proving as you read this.

To your specific points:

  1. The risk-free interest rate of domestic currency is determined by the central bank. Full stop. If "the markets" disagree, then "the markets" are perfectly free to attempt to stage a run on an entity that is solvent by fiat. Pulling off a short squeeze on some speculator who doesn't understand the monetary system is loads of fun.

  2. The central bank can always prevent the currency from appreciating. The central bank cannot prevent the currency from depreciating, but the central bank can procure sufficient hard currency in the open market (during those times when the currency is not under attack) to permit it to discharge the country's hard currency obligations and offer currency swaps to finance strategically important imports for 12-18 months.

- Jake

Friends come and go. Enemies accumulate.
by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Sep 12th, 2011 at 01:19:59 PM EST
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