Currency intervention is also popular as a forex intervention. That is when central banks sell or purchase their own country’s currency within the forex exchange market. The main foal of this intervention is to influence the currency’s value.
Defining Currency Intervention
This is one of the new practices in the monetary policy. Yet, we have had several countries implement this to control their currency valuation, like Japan, China, and Switzerland.
Mostly, countries do this intervention to keep the low domestic currency value relative to foreign currencies. That is because, if they experience a higher currency valuation they will experience less competitive export due to the product can be purchased higher with foreign currencies.
Thus, this currency intervention help countries to improve their exports as well as their economic growth.
One of the most popular currency intervention is the one done by China. The country wanted its currency value not to get appreciated in value against the U.S. since the country is an export-driven economy. Besides, the U.S. is its biggest competitor.
Thus, the country sold yuan to purchase the U.S. dollar-dominated assets, such as Treasuries. They did that to maintain their peg value against the dollar.
Ways to do Currency Intervention
There are two common methods to do currency intervention, the sterilized and non-sterilized transaction. The country usually decides the methods according to the changes to the monetary base that they expect.
Both methods, however, involve buying and selling foreign currencies or the bonds denominated in those currencies. In a sterilized transaction, there is an influence in the exchange rates that do not involve buying or selling foreign currencies or currency-denominated bonds.
Yet, at the same time, it buys and sells domestic currency bonds wishing to offset the amount. On the other hand, in the non-sterilized method, the central bank buys and sells foreign currency bonds using the domestic currency. This method also does not offset the transaction.
Other than those two ways, the central bank can also directly intervene in the currency in spot and forward market transactions.
The Effectiveness of the Interventions
Many people still debating the effectiveness of this intervention. Some economist thinks that the long term version of the non-sterilized version is effective to influence the exchange rate.
Yet, some other economists proof that this sterilized version has little to no effect in a long term period.