Foreign Exchange control is the term used for the set of rules and restrictions placed on usage or trading of foreign currency inside a country. The controls may be very simple like allowing the domestic currency to be the only currency which can be used inside the country or more restrictive as limiting the foreign currency that is brought in or the domestic currency that is taken out. Exchange controls are not seen in a very positive light with regard to foreign investment and international free trade. Countries can impose controls only by invoking Article 14 of the IMF trade agreement. The forex trading controls are not suitable for attracting foreign investment or FDI in any sector. These controls are chiefly imposed with the objective to control and stabilize the economy by doing away with the volatility the forex market trading brings with it. There is also a downside to strong controls of forex trading. It is seen that in some places, a black market or a parallel market starts functioning which can quote same rates or different rates from the rates officially determined. Exchange rates are determined on many factors.
The day to day changes are mostly based on the rates of previous days. Other factor which determines the rate is the exchange policy and the exchange controls. The forex treidar for each country is based on the forex policy maintained by the government in the country. It is the most important and strongest factor which can affect the rates. Controls should be used by countries where there is a fear that its currency could go into a devaluing spiral. It is usually the weaker economies that put in place higher controls. This might give stability to the currency but it comes at the cost of trade. International trade is highly affected by the foreign exchange restrictive and prohibitive policies. An International Monetary Fund working paper has found that a one point increase in controls on trade payment is equivalent to increase in tariff by 14 points. Moreover, it was also found that a one point increase in controls on foreign exchange transactions is equivalent to loss of trade that happens when tariff is increased by 11 points. This is a strong case to show that countries that apply exchange controls should review their policies periodically and should reduce them gradually once the currency is in a stable area.
Relationship between exchange controls
Most of the present day countries have imposed strong rules on foreign exchange at one point or another. United Kingdom is not an exception. To protect the interests of the country and its currency, exchange controls and trade provision controls were introduced into the defense act. It is vital to protect and regulate a country’s payment positions and trade positions especially in times of war. Such kind of act was supposed to have much less restrictive rules on different issues relating to foreign exchange. The exchange rates for different currencies were not fixed. A floating rate was used for foreign exchange transactions but there were restrictions on capital transactions that can be performed by residents. Direct investment related controls placed restrictions on domestic currency financed foreign investment, the exception to the rule was given when it ended up with positive effect on the balance of payments. Exchange control regulations in UK relating to portfolio investment imposed rules that restricted the means of purchasing foreign currency by residents. It stipulated that if a resident of United Kingdom wanted to invest in another country by purchasing foreign exchange, he can do so only by selling of existing foreign securities or by borrowing foreign currency. The research paper has found that after the abolition of the controls, around 30 billion pounds of outward flow of portfolio investment happened in 1980. This should be attributed to the elimination of the controls. After the abolition of the controls, these differential values were reduced. The research finds unquestionable reduction of volatility in the differential rates between traded rates and official rates. This has led to integration of parallel markets with the official ones. It is also said that the trade market of UK benefited from the removal of controls as it was able to integrate much better with the other overseas markets once the portfolio investment was liberalized.
By placing certain restrictions on residents for buying foreign currency and for selling domestic currency, the government can expect some semblance of stability on its economy. The controls are all good in times of emergency but for a country to flourish, trade is essential and trade can flourish when there are no or minimal controls. Foreign trade and investment are essential to any country. Sudden liberalization is not the answer but gradual elimination of the controls on foreign exchange will lead to better values and stability as seen from the examples of United Kingdom and many other countries that have abolished controls gradually. Such kind of forex trading books would help them in learning new strategies and market plans which would help them update themselves in the field. Selecting a book is also another very big issue. It is true that if one reads a good book, that book becomes the company for the person and would help him out in all the possible ways. But if the book chosen is not a perfect one then it would make the person end up loss because of wrong strategies and planning. Before entering in to a book one should go through the review of the book and should know about the author of the book then after selecting the book carefully which would help him out, he should start reading it. These books give knowledge on various systems in Forex trading which includes the hidden systems, the black box systems and so on. The various systems in trading and its strategies would be discussed in this forex trading system eBook. The forex trading books would help the existing trader in updating and renewing his knowledge into trading without facing any issue.