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Re your answer. In 'open markets', i.e markets without capital controls, the exchange rate is defended via the capital market, mostly bonds, vide recent Bank of England intervention to jazz up the pound, which consisted of continued government bond-buying. Because the attack on the pound went through the selling-off of British bonds. But also, nowadays, small unwanted variations can be handled via the repo market, I suppose, or swaps. It it true, though, that the Danish central bank in 2021 defended the krone from appreciation by first buying foreign currency, then lowering the interest rate, but it would have had much more difficulty the other way around, running into a balance-sheet constraint, as you put it, or not having enough foreign currency reserves. But then the krone lives in relative protection by shadowing the euro and following the ECB interest rates, sometimes adjusting the margins a bit so as to be close to the central rate.

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Thanks for the definition of liquidity, as 'a set of conditions that arise from the intentional behavior of market-makers'. However, I disagree with you when you say that central banks can control exchange rates (I mean if this is a statement that you endorse yourself, it is not quite clear), "a central bank can control an exchange rate (which is a price) if it is willing to provide liquidity by allowing the quantity of its FX reserves to fluctuate". Do you really believe that? To me, this is much too mechanical and also overlooks markets (say eurodollar for the US). Numerous are the central banks which have tried to flood the markets with their own currency or sell off foreign currency without the desired results. In olden days this was called intervention. In addition, there are differences between countries and, thirdly, normally central banks act through interest rates to turn the tide.

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