What Is Currency Intervention?

Definition & Examples of Currency Intervention

Definition

Currency intervention occurs when a central bank purchases or sells the country's own currency in the foreign exchange market to influence its value.

A trader looks over his currency portfolio.
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Definition and Examples of Currency Intervention

Anyone can trade currencies on foreign exchanges. They can 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 money's value.

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

Note

International financial policy is the congressionally mandated responsibility of the Treasury. In practice, the Treasury often coordinates with the Federal Reserve on these decisions.

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.

Note

Currency intervention is fairly rare. Between 1998 and 2011, it happened just three times.

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.

Key Takeaways

  • Currency interventions occur when a central bank buys or sells its own currency in the global forex market.
  • Most currency interventions are done to contain appreciation of a currency, which can hurt certain sectors.
  • Currency interventions can take place using a few strategies, but central banks ultimately don't have that much power in the scope of the broader forex market.
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Federal Reserve Bank of New York. "U.S. Foreign Exchange Intervention."

  2. Bank of Japan. "What Is Foreign Exchange Intervention? Who Decides and Conducts Foreign Exchange Intervention?"

  3. 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.

  4. Federal Reserve Bank of St. Louis. "The Great Foreign Exchange Intervention of 2011."

  5. Congressional Research Service. "U.S. Dollar Intervention: Options and Issues for Congress."

  6. Department of the Treasury. "Treasury Designates China as a Currency Manipulator."

  7. Department of the Treasury. "Treasury Releases Report on Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States."

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