Central banks

National central banks play an important role in the foreign exchange markets.
They try to control the money supply, inflation, and/or interest rates and often have
official or unofficial target rates for their currencies. They can use their often
substantial foreign exchange reserves to stabilize the market. Milton Friedman argued that
the best stabilization strategy would be for central banks to buy when the exchange rate
is too low, and to sell when the rate is too high—that is, to trade for a profit based on
their more precise information. Nevertheless, the effectiveness of central bank
"stabilizing speculation" is doubtful because central banks do not go bankrupt if they
make large losses, like other traders would, and there is no convincing evidence that
they do make a profit trading.
The mere expectation or rumor of central bank intervention might be enough to stabilize
a currency, but aggressive intervention might be used several times each year in countries
with a dirty float currency regime. Central banks do not always achieve their objectives.
The combined resources of the market can easily overwhelm any central bank.
Several scenarios of this nature were seen in the 1992–93 ERM collapse, and in more recent
times in Southeast Asia.