What is a Currency Intervention?

What is a Currency Intervention?

By Justin Kuepper   Updated September 26, 2019

Currency interventions - or forex interventions - occur when a central bank purchases or sells the country's own currency in the foreign exchange market to influence its value. The practice is relatively new in terms of monetary policy but has already been used by a number of countries including Japan, Switzerland, and China to control currency valuations.

For the most part, currency interventions are designed to keep the value of a domestic currency lower relative to foreign currencies. Higher currency valuations cause exports to be less competitive since the price of products is then higher when purchased in a foreign currency. As a result, a lower currency valuation can help improve exports and drive economic growth.

In this article, we will take a look at various currency interventions throughout history, how they're accomplished, and their effectiveness.

Currency Interventions throughout History

The first instance of currency intervention was arguably in the U.S. during the Great Depression when the government sterilized gold imports from Europe by selling U.S. dollars to maintain the gold standard at the time. But, currency interventions as we know them today didn't begin until much more recently after globalization influenced economics.

China is probably the most popular example of currency intervention. With an export-driven economy, the country wanted to ensure that the Chinese yuan didn't appreciate in value against the U.S. dollar since the U.S. was its biggest importer. The country sold yuan to purchase U.S. dollar-denominated assets like Treasuries and maintained a peg in value to the dollar.

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