Currency intervention, also known as foreign exchange intervention, refers to the actions taken by central banks or governments to influence the value of their currency in relation to other currencies. The primary goal of currency intervention is usually to stabilize or manipulate exchange rates.
There are two types of currency interventions: sterilized and unsterilized. Sterilized intervention involves offsetting the impact on money supply caused by buying or selling foreign currencies with domestic assets. This method aims to avoid inflationary effects. On the other hand, unsterilized intervention directly affects money supply and can lead to changes in interest rates and inflation.
Governments may intervene in currency markets for various reasons. They might want to prevent excessive appreciation or depreciation of their currency that could harm export competitiveness or create imbalances in trade. Additionally, interventions can be used as a tool to counteract speculative movements driven by market sentiment rather than economic fundamentals.
It’s important to note that while currency intervention can have short-term impacts on exchange rates, its long-term effectiveness remains debatable. Market forces such as economic fundamentals and investor sentiment often have a stronger influence on currency values over time.
In conclusion, currency intervention is a policy tool used by governments and central banks around the world to influence exchange rates. However, its effectiveness is limited and subject to market forces beyond control.