US & World Economies World Economy Trade Policy How Does the Government Regulate Exchange Rates? By Kimberly Amadeo Kimberly Amadeo Kimberly Amadeo is an expert on U.S. and world economies and investing, with over 20 years of experience in economic analysis and business strategy. She is the President of the economic website World Money Watch. As a writer for The Balance, Kimberly provides insight on the state of the present-day economy, as well as past events that have had a lasting impact. learn about our editorial policies Updated on May 31, 2022 Reviewed by Robert C. Kelly Reviewed by Robert C. Kelly Robert Kelly is managing director of XTS Energy LLC, and has more than three decades of experience as a business executive. He is a professor of economics and has raised more than $4.5 billion in investment capital. learn about our financial review board Share Tweet Pin Email Photo: Alex Segre / Getty Images The government indirectly regulates exchange rates, because most currency exchange rates are set on the open foreign exchange market (forex). In some countries, like China, the exchange rate is fixed, and the government directly controls it. This control of the yuan, in turn, affects the U.S. dollar. The yuan is loosely pegged to the U.S. dollar. Government Influence The U.S. government has various tools to influence the U.S. dollar exchange rate against foreign currencies. The nation's central bank—known as the Federal Reserve (Fed)—is an independent arm of the government. It indirectly changes exchange rates when it raises or lowers the fed funds rate—the rate banks charge to lend to each other. For example, if the Fed lowers the rate, this drives down interest rates throughout the U.S. banking system and increases the supply of money, which tends to weaken the dollar relative to other currencies, given the anticipated inflationary pressure. The diminished rates also tend to weaken demand for dollar-denominated assets, which can have a knock-on effect on the value of the currency. Treasury Department Role The Treasury Department is a government agency that also indirectly affects the exchange rate. It prints more money. This printing increases the supply and weakens the dollar. It can also borrow more money from other countries. That's done by selling Treasury notes, which increases the supply of money and increases the U.S. debt, and both will send the dollar's value down. The third government tool is the use of expansionary fiscal policies. Generally, these policies weaken the dollar, because they increase the supply of money. However, these policies can also improve economic growth, which tends to attract domestic and foreign investors to dollar-denominated assets. This demand can often overshadow the expansion in the supply of dollars. The chart below shows the Trade Weighted U.S. Dollar Index from 2000 through today: Regulations on Foreign Exchange Trading The Chicago Futures Trading Commission regulates forex brokers. It oversees all U.S. forex brokerage companies, enforces its regulations, and prosecutes outright fraud. Its authority was strengthened in 2010 with the Dodd-Frank Wall Street Reform Act. Approximately 95% of the $5.1 trillion traded daily on forex markets changes hands via spot currency transactions rather than futures transactions. Since these consist of two-day delivery rather than cash, they are considered the same as futures contracts. For this reason, a broker must register as a commodity trading advisor, a futures commission merchant, an introducing broker, or a commodity pool operator with the Commodity Futures Trading Commission and become a member of the National Futures Association. The U.S. National Futures Association (NFA) is a self-regulating association. All U.S. forex brokers operating on behalf of other U.S. clients must register. The NFA’s objective is to protect the integrity of U.S. markets and to protect investors from fraud, but the association doesn't get involved with the value of any particular currency. The U.S. Treasury Department is always on the lookout for any price-fixing in forex trading. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Commodity Futures Trading Commission. "Dodd-Frank Act." National Futures Association. "About NFA."