It is essential to understand that Forex is a market that plays out in everyday life in a way that other markets do not. A fluctuation in currency value can have an impact on a nation’s social, political, and economic conditions. In extreme situations, a nation’s entire political structure can be shaken to the core.
Because of these high stakes, a government often uses all its
power to control the value of its currency. It may decide that to
protect its private citizens from international traders and stabilize its economy the government needs to control how its currency is
traded. China , for example, has “pegged” its currency to the U.S. dollar, meaning that it has set a tight conversion rate of $1 to 7.27 yuan. This peg has defied market forces, which are pushing for the yuan to float against the dollar because of the huge trade imbalance between the two countries. But China has kept the peg, worried that simply allowing its currency to appreciate against the dollar would damage its economic growth and possibly throw its tightly monitored society into turmoil.