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How does a bank buy another currency?

 
 
Reply Fri 24 Jan, 2014 05:10 pm
I was reading a article from November that stated that the Central Bank of Peru was "stepping up its dollar purchases." Does this mean the bank was tarding the Peruvian currency for U.S. dollars, getting a loan from a U.S. source in which case the dollars would be owed back or neither?

Thanks!
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Type: Question • Score: 1 • Views: 996 • Replies: 2
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Ragman
 
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Reply Fri 24 Jan, 2014 05:23 pm
@MrAntigone,
Search engines Google and Wikipedia are your friends. Perhaps you should type in keyword phrase 'IMF' and you might find your info. Be advised that there are more than just the IMF that may serve to address that international currency exchange issue.

I've saved you a little time. Here's Wikipedia link that explains the function of International Monetary Fund:
http://en.wikipedia.org/wiki/IMF
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fobvius
 
  1  
Reply Fri 24 Jan, 2014 10:13 pm
@MrAntigone,
It means that the Central Bank of Peru were buying United States Dollars (USD) and selling Peruvian Nuevo Sol (PEN). Central banks enter the foreign exchange markets to smooth currency movements eg. PEN currency appreciation eroding the terms of trade making PEN denominated trade relatively more expensive against the USD. Central banks call other banks with whom they are willing to trade (eg. other central banks and large institutional banks) and ask them the rate at which they are willing (for example)to SELL USD10m and buy PEN from the Peruvian Central Bank. Trades are usually for value spot ie. two business days. Simultaneously buying and selling one currency against another in the spot and forward markets involves borrowing and lending the two currencies but this type of trade is usually for arbitrage purposes and does not fit the description of the trades in this instance.
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