The purpose of foreign exchange intervention is to affect the value of a currency, sometimes by intervening in the market. A central bank or government may intervene when its currency is out of sync with its economy. This can have adverse effects on the economy, especially in countries that export a lot. In these situations, foreign exchange intervention can be used to bring the currency back in line with the importers’ currency.
The goal of foreign exchange intervention
The goal of foreign exchange intervention is to weaken the currency and raise the balance of trade. In order to do this, a government sells domestic bonds and lends them abroad. However, the process of selling domestic bonds to buy foreign ones can be a disadvantage. Moreover, domestic borrowing pushes up the interest rate at home, which discourages investment and increases net exports. Therefore, foreign lending is a key part of exchange rate policy in order to lower foreign interest rates and increase foreign investments.
Important policy tool
Foreign exchange intervention is an important policy tool that many central banks use. These interventions affect currency prices worldwide and often have large spillover effects. Unlike traditional currencies, which can be maintained through huge trade surpluses, FX interventions can cause a country to fall out of the market and generate a recession. While FX intervention may have some positive effects, there are many negatives associated with it. A country may weaken its currency to boost its exports.