What is foreign exchange intervention?

What is foreign exchange intervention?

If a central bank takes actions that intentionally and artificially affect the value of a currency, particularly its own, it is engaging in what is known as a Foreign Exchange Intervention, or an interventionist policy.

Central banks occasionally use interventions in foreign exchange markets to achieve a desirable end. The banks will intentionally make trades and hold certain amounts of currencies or derivatives with the sole purpose of manipulating the value of their domestic currency. The reasons for that manipulation might be to slow down inflation or to make their county’s exports look more attractive by pushing the value of their currency lower.

China and Japan have recently been buying up billions of dollars in US Treasuries as a way to devalue their own currencies, which will make their exports more attractive in the short term and help their economies strengthen. For countries like theirs which depend on exports, a strong currency can be a very bad thing, and in Japan this is known as Endaka.

Interventions can make an economy more stable in the short term. Most of the large central banks do not engage in interventions as much as they used to.

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