Foreign Exchange Intervention

See: Foreign Exchange.

Drug addicts aren’t the only ones who need interventions.

Foreign exchange intervention is when a central bank steps into the forex (foreign exchange) market and changes the transfer rate of the currency. In the U.S., that means the Fed. Foreign exchange intervention is one of many monetary policy tools that central banks have in their arsenal to effect (or try to, at least) economic conditions.

For countries with less-stable currencies (the USD is pretty stable, fwiw), foreign exchange intervention can be a saving grace for the entire nation. Foreign exchange intervention allows countries with fluctuating currencies to stabilize the exchange rate and stop it from spiraling out of control.

Foreign exchange intervention is tough though; it’s hard to know what time is optimal and how far to turn the intervention dial up. It depends on the economy, the country’s reserves, and many other factors. While we can easily judge in hindsight, foreign exchange intervention done well in the moment is no easy feat.