Currency intervention

In foreign exchange intervention is the purchase or sale of domestic currency or foreign currency by central banks to influence the exchange rate. In addition to the interest rate policy, foreign exchange intervention are the only directly effective economic instrument to influence the currency market. In particular, in fixed exchange rate regimes, foreign exchange intervention are essential.

Method

The intervening central bank sold a portion of its foreign exchange reserves and on the other hand buys its own currency. This increases the supply of foreign currency on the foreign exchange market and scarce supply of its own currency. This leads to an appreciation of the domestic currency against all other currencies. Often find such interventions take place under consultation of other central banks. This can then also participate in the intervention, if it is in their own sense. Thus, they increase again the pressure on the market.

Effects

The effects caused by foreign exchange intervention changes in exchange rates, for example, impact on inflation development of a country: a devaluation of the domestic currency leads to an increase in the inflation rate in the country. An appreciation of the opposite effect. One can therefore say that a devaluation of the domestic currency leads to a promotion of exports. The size of exports increases, in contrast to the size of import and thus leads inflation a ( Macroeconomic equilibrium).

Moreover, they directly affect the competitiveness of domestic companies: A devaluation of the domestic currency leads to that world market prices of domestic suppliers fall. One of these reasons, deliberately administered devaluation is known as competitive devaluation or general beggar- thy- neighbor policies ( in German: 'll kill your neighbor to beggary ).

Application in the practice

As part not completely flexible exchange rate regime, foreign exchange intervention are almost essential. Therefore, they are carried out in a number of countries - for example in the European Exchange Rate Mechanism II (ERM II), by which a number of countries are bound with fixed exchange rates to the euro.

Also, in many Asian countries (eg China and Japan) are foreign exchange intervention on basic economic policy instruments. There, the interventions are used to so as to maintain the external value of the domestic currency low, and the country's competitiveness high. So China is buying, for example, constantly U.S. government bonds in order to obtain a constant dollar demand and keep its value constant. Since the yuan is pegged to the dollar, he also does not evaluate or down if the dollar holds its value constant.

From the U.S. Federal Reserve Fed this instrument is, however, used rather hesitant (and by the European Central Bank, with the exception of ERM II), mainly because the sustainable impact of exchange rates in the globalization hardly appears to be affordable. However, a coordinated intervention of several central banks to stabilize a currency is still possible if thereby the trade relations and economic stability of all countries involved can be backed up and the central bank councils seems to be a weakening or overvaluation of individual currencies temporary.

• Monetary policy
• Financial market activities