Currency intervention is a set of measures taken by the central bank in the currency market in order to support or weaken the national currency. This impact has an impact on the total demand and supply of money. Currency interventions are carried out with the aim of adjusting the rate of the national currency and maintaining its quotations in the currency band.
In other words, currency intervention is the intervention of the Central Bank in the course of trading. In order to be able to effectively intervene in the exchange rate of the national currency, the central banks of different states accumulate foreign exchange reserves in their assets.
Foreign exchange reserves are the national currency of strong economic world powers, which have a stable exchange rate and a high degree of liquidity.
There are several types of foreign exchange interventions:
Direct intervention. When the Central Bank conducts direct foreign exchange intervention, the actions take place officially. The media publishes the exact amount and time of the transaction.
During direct intervention, the Central Bank acts openly. He carries out transactions on his own behalf. There are cases when an increase or decrease in the exchange rate is beneficial to both countries, then foreign exchange interventions can be carried out with the participation of two central banks.
Verbal intervention. The country's central bank makes a statement of its intention to intervene. The market begins to react to rumors, but if statements are not further supported by real actions from the Central Bank, then the exchange rate, as a rule, returns to its previous level.
Indirect intervention. Latent or indirect foreign exchange intervention is carried out by commercial banks on behalf of the Central Bank. As a rule, this is the most unexpected and unpredictable type of foreign exchange intervention. It has an unusually large effect on the market because it happens unexpectedly. During the indirect (hidden) foreign exchange intervention, there are very sharp fluctuations in the exchange rate of the national currency. Most traders and market speculators do not like the currency interventions of the Central Bank very much, because they can change the current trend and bring nervousness into the course of trading.
There is an intervention aimed at the current movement of the national currency. It aims to strengthen the existing movement.
Currency intervention directed against the market helps the national currency change direction to start moving against the emerging trend. However, such intervention of the Central Bank sometimes ends in failure. The market continues to move in the same direction.
