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Learn more and compare subscriptions content expands above. Full Terms and Conditions apply to all Subscriptions. Or, if you are already a subscriber Sign in. Other options. Close drawer menu Financial Times International Edition. Search the FT Search. World Show more World. US Show more US. Learn why countries choose to do this form of intervention and how it works. 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 money's value. International financial policy is the Congressionally-mandated responsibility of the Treasury. But in practice, the Treasury often coordinates with the Federal Reserve on these decisions. At some points, a central bank feels like its currency is quickly appreciating gaining value or depreciating losing value.
This may be cause for it to decide to step in. It will conduct currency intervention to slow the movement. It 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.
This is 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. This can help increase exports and spur economic growth.
If the U. 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. Central bank currency interventions do trade large amounts of money. But 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. In a broader sense, the first instance of currency intervention took place long ago. Intervention occurs when a central bank buys or sells its own currency in an effort to influence the exchange rate. A government might take action to halt a precipitous slide or a sharp runup in its currency following a shock.
It could also act in concert with or on behalf of other countries in an effort to stabilize a particular currency. In fact, the last time the U. Utilizing their massive reserves, central banks can get their way, at least in the short term. But even central banks can be overwhelmed by the market if fundamentals are out of line with goals.
Intervention is hardly novel. In fact, as the Goldman Sachs chart below illustrates, until around the mids, it was relatively common for the U. But unilateral intervention has long been out of favor, with the U. According to the New York Fed, the foreign currencies used to intervene by the U.
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