Today, in many countries of the world, a policy of a controlled exchange rate of the national currency is being pursued, for which state central banks carry out so-called foreign exchange interventions optimized for a certain value of the domestic currency. After all, letting go of the national currency in free swimming, you can get problems in the economy. What is the Central Bank's currency intervention, and how is it carried out - this should be examined in more detail.
Definition of intervention
Currency intervention is a one-time transaction for the purchase or sale of foreign currency in the Russian Federation carried out by the Bank of Russia. Moreover, the volume of foreign exchange intervention is usually quite large. Their goal is to regulate the national currency in the interests of the state. Basically, such actions are implemented in order to strengthen the national currency, but sometimes they can be aimed at weakening it.
Such operations can significantly affect both the foreign exchange market as a whole and the rate of a particular currency. Foreign exchange interventions are initiated by the Central Bank of the country and, basically, they are the main method of conducting monetary policy. In addition, the regulation of foreign exchange relations, especially when it comes to third world countries, occurs in conjunction with other IMF participants. To participate in such events, banks and treasuries are involved, and manipulations are carried out not only with currencies, but also with precious metals, in particular with gold. The foreign exchange intervention of the Central Bank is carried out exclusively by prior arrangement and is carried out at specific, pre-agreed dates.
Mechanisms for raising and lowering the national currency
In fact, the mechanism for regulating the national currency is very simple, and it is built on the basis of the principle of "supply and demand." If it is necessary to increase the value of domestic money, the Central Bank of the country begins to actively sell foreign banknotes (mainly the dollar), and any other convertible currency can be used. Thus, the intervention of the Central Bank leads to an overabundance (increased supply) of foreign currency in the financial market. At the same time, the Central Bank is buying up the national currency, which creates additional demand for it, which makes the rate grow even faster.
In the exact opposite way, the Central Bank conducts currency intervention aimed at weakening the national currency, which they are beginning to sell actively, not allowing its value to grow. The purchase of foreign banknotes leads to their artificial shortage in the domestic market.
Types of Currency Interventions
It is noteworthy that the intervention of the Central Bank does not always mean the purchase and sale of a large amount of currency, a fictitious procedure can be carried out from time to time, sometimes it is called verbal. In such cases, the Central Bank makes some kind of rumor or “duck”, as a result of which the situation in the foreign exchange market can noticeably change. Sometimes fictitious intervention is used to enhance the effect of real currency intervention. Also very often, several banks can join forces in order to achieve the desired result.
Practice shows that verbal intervention is used by Central Banks much more often than real. A major role in such cases is played by the suddenness factor. In any case, the Central Bank’s intervention aimed at strengthening the trend existing in the foreign exchange market is usually more successful than manipulations aimed at reversing it.
Currency intervention on the example of Japan
History knows a lot of cases of manipulation in the foreign exchange market. For example, in 2011, due to difficulties in the economies of the United States and the European Union, Japan had to adjust the exchange rate of the national currency, and the country's authorities were forced to reduce it. The Minister of Finance of Japan said that speculation in the foreign exchange market led to an overvaluation of the yen against foreign banknotes, and this state of affairs does not correspond to the state of the country's economy. Subsequently, it was decided to adjust the yen in conjunction with the Central Bank of the Western countries, for which Japan made several major transactions to purchase foreign currency. The introduction of trillions of yen into the foreign exchange market helped lower its exchange rate by 2% and balance the economy.
The use of financial leverage in Russia
A striking example of the application of financial leverage in Russia can be observed since 1995. Until that moment, the Central Bank was selling foreign currency to regulate the ruble exchange rate, and in July 1995 the principle of the currency corridor was introduced, according to which the value of the national currency should be maintained within established limits and over a certain period of time. However, changes in the global economy by 2008 made this model of monetary policy ineffective, after which a dual-currency corridor was introduced. In this case, the ruble was regulated based on its relationship to the dollar and the euro. One way or another, the Central Bank conducts currency interventions, following this monetary policy.
The events of 2014-2015 affected the fruitfulness of currency interventions conducted by the Central Bank of Russia, so its recent manipulations did not give the desired result. The fall in oil prices, the associated reduction in Central Bank reserves and the budget mismatch ultimately make currency interventions irrational and pointless.
