For instance, if a central bank wanted to increase the value of its currency, it might intervene in foreign exchanges and buy its own currency.
Alternate names: Foreign exchange intervention, forex intervention
How Does Currency Intervention Work?
At some point, a central bank may feel like its currency is appreciating (gaining value) or depreciating (losing value) too quickly. This may be cause for it to conduct currency intervention to slow the movement. Currency intervention can be used to influence movement in either direction, but currency interventions often aim to keep the value of a domestic currency lower relative to foreign currencies. Higher currency valuations cause exports to be less competitive, because the price of products is then higher when purchased in a foreign currency. On the other hand, a lower currency valuation lowers the relative cost of a country’s exports, which can help increase exports and spur economic growth. If the U.S. wants to decrease the value of the dollar, for instance, the Fed will sell U.S. dollars. If the U.S. wants to increase the value of the dollar, the Fed will buy more U.S. dollars. To keep a consistent amount of money in bank reserves as it buys and sells dollars, the Fed will “sterilize” the intervention. This process involves selling or buying bonds in proportion to the size of the currency intervention. Central bank currency interventions trade large amounts of money, the values aren’t as significant in the scope of total forex trading. That means currency intervention doesn’t immediately increase or decrease a currency’s value. Instead, it signals the direction that a country’s government is trying to push its currency, which may affect the decisions investors make. As more investors follow the Fed’s movement, the currency value begins to shift.
Currency Interventions Throughout History
In a broader sense, the first instance of currency intervention took place long ago. It happened well before the globalization of currency trading and the establishment of a forex market that any trader could access from their computer or phone. As early as the 1920s, the Fed conducted a sort of currency intervention by simultaneously buying gold and selling U.S. dollars. The U.S. engaged in currency intervention in 2011 to reduce the relative strength of the Japanese yen. Japan had just suffered a massive earthquake. In only five days, the yen’s value against the U.S. dollar increased by 5%. The U.S. joined other G7 countries in currency intervention to stabilize the value of the yen as well as the broader forex market. Currency intervention isn’t always an international cooperative effort, as it was in the wake of Japan’s 2011 earthquake. In August 2019, for instance, Treasury Secretary Steve Mnuchin accused China of manipulating its currency. He believed that China was doing so to create an unfair advantage in the global marketplace. Mnuchin said that China was devaluing the yuan so that other countries would choose to import more products from China and fewer from the U.S. In 2020, the Treasury determined that Switzerland and Vietnam were currency manipulators as well. Other countries that made the Treasury’s watchlist for possible manipulation included Japan, Korea, Germany, Italy, Singapore, Malaysia, Taiwan, Thailand, and India.
