Foreign-exchange intervention

Foreign-exchange intervention is an official purchase or sale of currencies intended to influence exchange rates, market liquidity, or related financial conditions.

Sterilized foreign-exchange intervention: Currency-market intervention offset by domestic operations that leave the monetary base unchanged. It separates the exchange-rate transaction from its direct effect on domestic money supply.
Foreign-exchange market: A global, decentralized market where currencies are traded against one another. Official intervention takes place within this market or through transactions linked to it.
Plaza Accord: A 1985 agreement by five major economies to coordinate action toward a lower U.S. dollar. It is a prominent case of coordinated intervention accompanying a shared exchange-rate objective.
Floating exchange rate: An exchange-rate arrangement in which a currency’s value is mainly determined by market supply and demand. A float permits currency adjustment without a standing commitment to defend a particular rate.
Unsterilized foreign-exchange intervention: Currency-market intervention that changes the domestic monetary base and monetary conditions. Its monetary effects can reinforce the intervention’s pressure on the exchange rate.
Exchange-rate peg: A policy that fixes a currency’s value against another currency or a defined basket. A peg often requires purchases or sales to keep the market rate near its target.
Louvre Accord: A 1987 agreement by major economies to stabilize exchange rates after the dollar’s decline. It illustrates coordinated efforts to resist further currency movement after an earlier intervention campaign.
Monetary policy: Central-bank actions that influence interest rates, money, and credit to pursue economic objectives. Interest-rate changes can move exchange rates through a broader policy channel than currency trades alone.
Portfolio balance channel: A transmission mechanism in which asset purchases change relative supplies and required returns across imperfectly substitutable assets. It explains how intervention can affect exchange rates even when monetary conditions are sterilized.
Currency crisis: A sharp loss of confidence in a currency, often involving rapid depreciation or reserve depletion. Intervention may attempt to slow a run on the currency, sometimes with limited success.

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