Definition of Currency Intervention
Currency intervention occurs when a central bank buys or sells its own currency in the foreign exchange market to influence its value.
Definition and Examples of Currency Intervention
Anyone can trade currencies in foreign exchanges. They can profit from the movement of one currency’s value against another. When a country’s central bank enters those foreign exchanges and trades its own currency, this is currency intervention. By trading large amounts of its own currency, these central banks can influence the currency’s value.
For example, if a central bank wants to increase the value of its currency, it may intervene in the foreign exchanges and buy its own currency.
Alternative names: Foreign exchange intervention, forex intervention.
Note: International monetary policy is a legally mandated responsibility of the treasury. In practice, the treasury often coordinates with the Federal Reserve in these decisions.
How Does Currency Intervention Work?
Sometimes, a central bank may feel that its currency is rising (gaining value) or falling (losing value) too rapidly. This may be a reason to conduct currency intervention to slow down the movement.
Currency intervention can be used to influence movement in any direction, but currency interventions often aim to keep the local currency value lower compared to foreign currencies. High valuations of a currency make exports less competitive, as the price of products is higher when purchased with foreign currency. On the other hand, lower valuations of a currency reduce the relative cost of exports in the country, helping to boost exports and enhance economic growth.
For example, if the United States wanted to reduce the value of the dollar, the Federal Reserve would sell U.S. dollars. If the United States wanted to increase the value of the dollar, the Federal Reserve would buy more U.S. dollars.
To maintain a stable amount of funds in banks’ reserves while buying and selling dollars, the Federal Reserve will “sterilize” the intervention. This process involves selling or buying bonds in proportion to the size of the currency intervention.
Central bank interventions trade large amounts of money, but the values are not significant in the context of total global currency trading. This means that currency intervention does not immediately increase or decrease the value of the currency. Instead, it indicates the direction that the government is trying to push its currency, which may influence investor decisions. As more investors follow the Federal Reserve’s movement, the currency value begins to shift.
Currency Interventions Throughout History
In a broader sense, the first currency intervention happened long ago. It occurred before the era of global currency trading and the establishment of the forex market that any trader can access from their computer or phone. In the early 1920s, the Federal Reserve conducted currency intervention by buying gold and selling U.S. dollars at the same time.
The United States participated in currency intervention in 2011 to reduce the relative strength of the Japanese yen. Japan had experienced a massive earthquake. In just five days, the value of the yen increased against the U.S. dollar by 5%. The United States joined the other G7 countries in a currency intervention to stabilize the yen’s value as well as the global foreign market.
Note: Currency intervention rarely occurs. Between 1998 and 2011, it happened only three times.
Currency intervention is not always a collaborative international effort, as it was following the Japan earthquake in 2011. In August 2019, Treasury Secretary Steven Mnuchin accused China of manipulating its currency. He believed that China was doing this to create an unfair advantage in the global market. Mnuchin stated that China was devaluing the yuan so that other countries would choose to import more products from China and fewer from the United States.
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In 2020, the Treasury decided that Switzerland and Vietnam were also currency manipulators. Other countries that were placed on the watch list for potential manipulation included Japan, Korea, Germany, Italy, Singapore, Malaysia, Taiwan, Thailand, and India.
Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we fact-check and maintain the accuracy, reliability, and quality of our content.
Federal Reserve Bank of New York. “U.S. Foreign Exchange Intervention.”
Bank of Japan. “What is Foreign Exchange Intervention? Who Decides and Carries Out Foreign Exchange Intervention?”
Federal Reserve Bank of St. Louis. “The International Gold Standard and U.S. Monetary Policy from World War I to the New Deal,” page 428.
Federal Reserve Bank of St. Louis. “The Major Foreign Exchange Intervention of 2011.”
Congressional Research Service. “U.S. Dollar Intervention: Choices and Issues for Congress.”
Department of the Treasury. “Treasury Designates China as a Currency Manipulator.”
Department of the Treasury. “Treasury Releases Report on Monetary Policies and Foreign Exchange Policies of Major Trading Partners of the United States.”
Source: https://www.thebalancemoney.com/what-is-a-currency-intervention-1978925
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