What Is Currency Intervention?
Definition & Examples of Currency Intervention
Currency intervention is a type of monetary policy in which a country's central bank purchases or sells its own currency in the foreign exchange market to influence its value.
Learn why countries choose to do this form of intervention and how it works.
What Is Currency Intervention?
Anyone can trade currencies on foreign exchanges. This allows traders to profit off of how the value of one currency moves in relation to another. When a country's central bank enters into those foreign exchanges and trades its own currency, that is currency intervention. By trading large amounts of its own currency, these central banks can influence the value of its currency.
- Alternate names: Forex intervention, foreign exchange intervention
International financial policy is technically the Congressionally-mandated responsibility of the Treasury. In practice, however, the Treasury typically coordinates with the Federal Reserve on these decisions.
How Does Currency Intervention Work?
When a central bank feels like its currency is rapidly appreciating (gaining value) or depreciating (losing value), it may decide to step in and conduct currency intervention to slow the movement.
While it can be used to influence movement in either direction, 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 since the price of products is then higher when purchased in a foreign currency. Conversely, 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 Federal Reserve will sell U.S. dollars. If the U.S. wants to increase the value of the dollar, the Federal Reserve will buy more dollars.
To keep a consistent amount of money in bank reserves as it buys and sells dollars, the Fed will "sterilize" the intervention. This sterilization involves selling or buying bonds in proportion to the size of the currency intervention.
While central bank currency interventions do trade large amounts of money, the values aren't as significant in the scope of total forex trading. Therefore, 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 well before the globalization of currency trading and the establishment of a forex market that any trader could access from their computer or smartphone. As early as the 1920s, the Federal Reserve conducted a sort of currency intervention by simultaneously buying gold and selling U.S. dollars.
More recently, 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, and in only five days, the yen's value against the U.S. dollar increased by 5%. The U.S. joined other G7 countries in performing currency intervention to stabilize the value of the yen as well as the broader forex market.
Currency intervention is relatively rare. From August 1995 through December 2006, for instance, the U.S. conducted currency intervention on only two occasions.
Currency intervention isn't always an international cooperative effort, as it was in the wake of Japan's 2011 earthquake. In August 2019, for example, Treasury Secretary Steve Mnuchin accused China of manipulating its currency to create an unfair advantage in the global marketplace. He said China was aggressively devaluing the yuan so that other countries would choose to import more products from China and fewer from the U.S.
- Currency interventions occur when a central bank buys or sells domestic currency in the global forex market.
- Most currency interventions are conducted to contain excessive appreciation of a currency, which can hurt the manufacturing and export sectors.
- Currency interventions can take place using several different strategies, but central banks ultimately don't have that much power in the scope of the broader forex market.