Currency intervention is also known as currency manipulation or forex intervention. These central bank-pursued interventions happen as they buy or sell their own national currency on the global foreign exchange markets. They do this to raise or lower the value of their currency.
Though these types of manipulations have occurred since the Great Depression, they are fairly new as a form of national monetary policy. Countries that have used this type of intervention heavily to limit the rise of their currencies in recent years are Japan, China, and Switzerland.
In general, central banks use currency intervention as a tool to contain the rising value of their own money as compared to those of other countries. When currency values appreciate, a nation’s exports become more expensive and so are less competitive abroad. This happens because their goods cost more to buyers in their own foreign currencies. It explains why central banks prefer lower currency values which boost their nation’s exports and improve economic growth rates.
The first significant use of currency intervention occurred on the side of the United States in the depths of the Great Depression. The American government counterbalanced imports of gold coming from Europe by selling off American dollars so that the gold standard would be upheld. Only when globalization had dramatically impacted economics did the large scale currency interventions of today become more commonplace.
China has been a major perpetrator of currency intervention in recent decades. They have been constantly concerned with keeping their Chinese Yuan value down against the dollar so that their all important exports did not become more expensive to their biggest customer. They aggressively sold Yuan and bought assets denominated in American dollars such as Treasuries in order to keep up a peg against the dollar.
The Swiss National Bank and Bank of Japan have also engaged in manipulation of the currency markets more recently to try to stem the over appreciation of their own national currencies. As the recipient of safe haven investment flows, these two countries find economic instability causes investors to seek their currencies the franc and yen for safety.
They have responded by selling their own currencies and buying those of main trading partners, such as the euro and dollar. Switzerland made headlines in January of 2015 when it suddenly abandoned its interventionist Euro ceiling as unsustainable. The Swiss franc gyrated as much as 30 percent higher in value in hours before settling between 10 percent and 20 percent more against the euro and dollar.
Currency interventions can be either sterilized or non sterilized. Sterilized interventions do not alter the money base of the country. Instead they offset foreign bond purchases or sales by performing the opposite transaction with its own currency bonds. Either means of intervening requires the central bank to sell or buy foreign currencies or bonds issued in such currencies. This allows them to decrease or increase their currency’s value in global forex markets.
Central banks may also purchase and sell currency using transactions in forex spot or forward market instruments. They are literally buying or selling foreign currency with their own nation’s currency in these cases. They pursue such actions in order to impact the near term valuations of their currency.
Economists question how effective such interventions really are. They generally agree that sterilized transactions cause little lasting effect. Spot and forward market purchases and sales tend to affect values short term but often do not last. Economists mostly concur that longer term currency interventions which are not sterilized can effectively impact exchange rates since they change the monetary base.