What Is Currency Intervention?
Currency intervention occurs when a central bank buys or sells currency to influence its exchange rate. Learn how it affects businesses.
Key Takeaways
- Central banks intervene by buying or selling foreign currency reserves
- Intervention is used to stabilise a currency or combat excessive volatility
- Sterilised intervention does not change the money supply; unsterilised does
- Intervention is most effective when backed by broader monetary policy changes
What currency intervention is
Currency intervention occurs when a central bank or government authority actively buys or sells its own currency in the foreign exchange market to influence the exchange rate. If a central bank wants to weaken its currency, it sells its own currency and buys foreign currency. If it wants to strengthen, it sells foreign currency and buys its own.
Why central banks intervene
Reasons include: preventing excessive volatility that disrupts trade and investment; resisting a speculative attack on the currency; maintaining a currency peg or managed float regime; or correcting a fundamental misalignment between the market rate and economic fundamentals. Most developed economy central banks intervene rarely and prefer to let markets set the rate.
Sterilised vs unsterilised
When a central bank sells foreign reserves to buy its own currency, money is removed from the domestic economy, reducing the money supply. To avoid this deflationary effect, central banks often sterilise the intervention by conducting offsetting open market operations — buying domestic bonds to inject money back in. Sterilised intervention changes the exchange rate without changing the money supply.
Effectiveness
The evidence on effectiveness is mixed. In the short term, a large, credible intervention can move the exchange rate significantly. In the long term, intervention rarely overcomes underlying fundamentals. A country with high inflation cannot keep its currency strong through intervention alone — eventually fundamentals prevail.
Implications for businesses
If you trade in currencies of countries that actively manage their exchange rate (China, many emerging markets), intervention is a recurring factor in your FX exposure. The People's Bank of China regularly intervenes to prevent USD/CNY from moving too far in either direction. Understanding a country's intervention policy helps you anticipate the bounds within which the exchange rate is likely to move.