The currency intervention , also known as foreign exchange market intervention or currency manipulation is a monetary policy operation. It happens when the government or central bank buys or sells foreign currency in return for their own domestic currency, generally with the aim of influencing exchange rates and trade policies.
Policy makers can intervene in the foreign exchange market to advance economic goals: controlling inflation, maintaining competitiveness, or maintaining financial stability. Appropriate goals tend to depend on a country's development stage, the level of financial market development and international integration, and the overall vulnerability of the country to shocks, among other factors.
Video Currency intervention
Destination
There are many reasons why a country's monetary and/or fiscal authority may wish to intervene in the foreign exchange market. The central bank generally agrees that the main purpose of foreign exchange market intervention is to manage volatility and/or affect exchange rate levels. The government prefers to stabilize the exchange rate due to excessive short-term volatility eroding market confidence and affecting financial markets and real-estate markets. When there is excessive instability, the uncertainty of the exchange rate generates additional costs and reduces profits for the company. As a result, investors do not want to invest in foreign financial assets. Companies are reluctant to engage in international trade. In addition, exchange rate fluctuations will spill over into financial markets. If exchange rate volatility increases the risk of holding a domestic asset, then the price of these assets will also become more volatile. Increased volatility in financial markets will threaten the stability of the financial system and make monetary policy goals more difficult to achieve. Therefore, the authorities conduct currency intervention. In addition, when economic conditions change or when markets misinterpret economic signals, authorities use foreign exchange interventions to improve exchange rates, to avoid overshooting from both directions. Anna Schwartz argues that the central bank could cause a sudden collapse of speculative excesses, and that they can limit growth by limiting money supply.
Currently, foreign exchange market intervention is mostly used by central banks of developing countries, and less so by developed countries. There are several reasons why most developed countries are no longer actively intervening:
- Research and experience show that the instrument is only effective (at least beyond a very short time frame) when viewed as a shadow of interest rates or other policy adjustments. Without a durable and independent impact on the nominal exchange rate, interventions are considered to have no lasting strength to affect the real exchange rate and thus competitive conditions for the tradable sector.
- Large-scale interventions can undermine monetary policy stance.
Developing countries, on the other hand, occasionally intervene, perhaps because they believe instruments to be effective tools in situations and situations they face. The goals include: to control inflation, to achieve an external balance or to increase competitiveness to encourage growth, or to prevent currency crises, such as major changes in depreciation/appreciation.
In the paper of the Bank for International Settlements (BIS) published in 2015, the authors describe the general reasons the central bank intervened. Based on the BIS survey, in the foreign exchange market "emerging market central banks" use the strategy of "relying on the wind" "to limit exchange rate volatility and smooth exchange rate trends". In their 2005 meeting on foreign exchange market intervention, central bank governors have noted that, "Many central banks will argue that their main goal is to limit exchange rate volatility rather than to meet specific targets for exchange rate levels". Other reasons cited (which do not target exchange rates) are to "slow down the rate of exchange rate change", "dampen exchange rate fluctuations", "supply liquidity to the forex market", or "affect the level of foreign exchange reserves".
Maps Currency intervention
Historical context
In the era of the Cold War of the United States, under the Bretton Woods fixed exchange rate system, interventions were used to help maintain exchange rates within specified margins and are considered essential for the central bank's toolkit. The dissolution of the Bretton Woods system between 1968 and 1973 was largely due to the "provisional" suspension of President Richard Nixon of the dollar's convertibility to gold in 1971, after the dollar struggled throughout the late 1960s due to large increases in the price of gold. Efforts to revive the exchange rate remained unsuccessful, and in March 1973 the major currencies began to drift against each other. Since the end of the traditional Bretton Woods system, IMF members are free to choose the form of exchange arrangement they want (except to group their currency into gold), such as: allowing free floating currency, grouping the currency into another currency or currency basket, adopting the eye money of other countries, participate in currency blocs, or form part of monetary union. The end of the traditional Bretton Woods system in the early 1970s and movements into the managed currency led to large-scale increases in currency interventions throughout the 1970s and 80s.
From 2008 to 2013, central banks in emerging markets economies (EMEs) should "reexamine their foreign exchange market intervention strategy" because of "major changes in capital flows to and from EME.
Unlike their experience in the early 2000s, some countries that at different times resisted the pressure of rewards suddenly found themselves having to intervene against strong depreciation pressures. The sharp rise in long-term US interest rates from May to August 2013 caused great pressure on the currency market. Some EMEs sell large amounts of foreign exchange, raise interest rates and - equally important - provide the private sector with insurance against exchange rate risk.
Live intervention
Direct currency interventions are generally defined as foreign exchange transactions conducted by the monetary authorities and aim to influence the exchange rate. Depending on whether it changes the monetary base or not, currency interventions can be distinguished between sterilization interventions and non-sterile interventions, respectively.
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- Sterilization intervention
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- Sterilized intervention is a policy that tries to influence the exchange rate without changing the monetary base. The procedure is a combination of two transactions. First, the central bank intervenes nonsterilized by buying (selling) foreign currency bonds using the domestic currency it releases. Then the central bank "sterilizes" the effect on the monetary base by selling (buys) a number of domestic bonds-the corresponding currency to absorb the initial rise (decline) of the domestic currency. The net effect of the two operations is the same as the domestic currency bond swap for foreign currency bonds without any change in the money supply. With sterilization, each purchase of foreign currency is accompanied by the sale of domestic bonds of equal value, and vice versa.
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- For example, would like to lower the exchange rate/domestic currency price without changing the monetary base, the authority to buy foreign currency bonds, the same action as in the last section. After this action, to keep the monetary base, the government makes new transactions, selling the same amount of domestic currency bonds, so the total money supply returns to its original level.
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- Intervention is not sterilized
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- Non-sterilizing interventions are policies that change the monetary base. In particular, the authorities affect the exchange rate through the purchase or sale of foreign currency or bonds in the domestic currency;
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- For example, in order to reduce the exchange rate/domestic currency price, the authorities may purchase foreign currency bonds. During this transaction, an additional supply of domestic currency will drag down the price of the domestic currency, and additional demand for foreign currency will drive up the price of foreign currency. As a result, the exchange rate falls.
Indirect intervention
Indirect currency intervention is a policy that affects the exchange rate indirectly. Some examples are capital controls (taxes or restrictions on international transactions in assets), and exchange controls (currency trading restrictions). Such policies may cause inefficiencies or reduce market confidence, but may be used as emergency damage controls.
Effectiveness
Non-sterilization intervention
In general, there is a consensus in the profession that unsterilized intervention is effective. Similar to monetary policy, nonsterilized interventions affect exchange rates by encouraging changes in monetary base stocks, which in turn induce changes in broader monetary aggregates, interest rates, market expectations and ultimately exchange rates. As we pointed out in the previous example, the purchase of foreign currency bonds leads to an increase in the currency-home money supply and thus a decline in the exchange rate.
Sterilization intervention
On the other hand, the effectiveness of sterile intervention is more controversial and ambiguous. By definition, sterilized interventions have little to no effect on the domestic interest rate, as the money supply level remains constant. However, according to some literatures, sterilized interventions can affect exchange rates through two channels: portfolio balance channel and hope or signal channel.
- Portfolio Balance Channel
- In the approach of portfolio balances, domestic and foreign bonds are not a perfect substitute. Agents balance their portfolios between domestic and bond money, as well as foreign currency and bonds. Whenever the aggregate economic conditions change, the agent adjusts its portfolio to a new equilibrium, based on various considerations, namely, wealth, tastes, expectations, etc. Thus, this action to balance the portfolio will affect the exchange rate.
- The Expectations or Signaling Channel
- Even if domestic and foreign assets are a perfect substitute from each other, sterilized intervention is still effective. According to channel channel theory, agents can see exchange rate interventions as a signal about future policy attitudes. Then changes in expectations will affect the current exchange rate.
Modern examples
According to Peterson Institute, there are four prominent groups as a frequent currency manipulator: developed and advanced developed countries such as Japan and Switzerland, new industrialized nations such as Singapore, Asian developing countries such as China and oil exporters, such as Russia. Chinese currency intervention and foreign exchange holdings are unprecedented. It is common for countries to manage their exchange rates through the central bank to make their exports cheaper. The method is being used extensively by emerging markets in Southeast Asia, in particular.
The US dollar is generally the main target for these currency managers. The dollar is the main reserve currency of the global trading system, which means the dollar is traded freely and accepted with confidence by international investors. The Open Market Account System is a monetary tool of the Federal Reserve system that can intervene to counter the uncertain market conditions. In 2014, a number of major investment banks, including UBS, JPMorgan Chase, Citigroup, HSBC and Royal Bank of Scotland were fined for currency manipulation.
Swiss franc
As the 2007-08 financial crisis hit Switzerland, the Swiss franc appreciated "as the flight to safety and return of Swiss franc debt repayments brings trading in high-yielding currencies." On 12 March 2009, the Swiss National Bank (SNB) announced that it intends to purchase foreign exchange to prevent the Swiss franc from further appreciation. Influenced by the purchase of SNB euro and US dollar, Swiss franc weakened from 1.48 against euro to 1.52 in one day. At the end of 2009, currency risk appears to be resolved; SNB changed its attitude to prevent great appreciation. Unfortunately, the Swiss franc is beginning to appreciate again. Thus, the SNB stepped once again and intervened at a rate of over CHF 30 billion per month. At the end of June 17, 2010, when the SNB announced the end of the intervention, it had bought the equivalent of $ 179 billion Euro and US dollars, amounting to 33% of Swiss GDP. Furthermore, in September 2011, SNB affected the foreign exchange market again, and set the minimum exchange rate target of SFr 1.2 to Euro.
On January 15, 2015, the SNB abruptly announces that it will no longer hold the Swiss Franc at a fixed exchange rate with the euro set in 2011. The franc is soaring in response; The euro fell about 40 percent in value in relation to the franc, falling as low as 0.85 francs (from the original 1.2 francs).
When investors flocked to the franc during the financial crisis, they dramatically raised their value. Expensive francs may have great adverse effects on the Swiss economy; the Swiss economy is heavily dependent on the sale of goods abroad. Exports of goods and services are worth more than 70% of Swiss GDP. To maintain price stability and lower the value of the franc, the SNB created a new franc and used it to buy euros. Increasing the supply of francs relative to the euro in the foreign exchange market caused the value of the franc to fall (ensuring the euro is worth 1.2 francs). This policy resulted in SNB collecting about $ 480 billion-the value of foreign currency, an amount equal to about 70% of Swiss GDP.
The Economist asserts that the SNB dropped hats for the following reasons: first, increased criticism among Swiss citizens about the accumulation of large foreign exchange reserves. Fears of escaping inflation underlie these criticisms, although franc inflation is too low, according to the SNB. Second, in response to the European Central Bank's decision to launch a quantitative easing program to combat euro deflation. The consequences of the devaluation of the euro will require the SNB to devalue the franc further if they decide to keep the exchange rate steady. Third, because of the recent euro depreciation in 2014, the franc lost about 12% of its value against USD and 10% against rupees (goods and services exported to the US and India accounted for about 20% of Swiss exports).
Following the SNB announcement, the Swiss stock market declined sharply; because of a stronger franc, the Swiss company will have a more difficult time selling goods and services to a nearby European citizen.
In June 2016, when the results of the Brexit referendum were announced, the SNB provided rare confirmation that it has increased the purchase of foreign currency again, as evidenced by the increase in commercial deposits to national banks. Negative interest rates coupled with targeted foreign currency purchases have helped to limit the strength of the Swiss franc in a time when demand for safe haven currencies increased. Such interventions ensure the competitiveness of Swiss product prices in the EU and global markets.
Japanese Yen
From 1989 to 2003, Japan suffered a long period of deflation. After experiencing an economic boom, Japan's economy slowly declined in the early 1990s and entered a deflationary spiral in 1998. During this period, Japan's production activity was stagnant; deflation, in the sense of negative inflation, continues to fall, and unemployment rises. At the same time, confidence in the financial sector diminished, and some banks failed. During that period, the Bank of Japan, which had become legally independent in March 1998, aimed to stimulate the economy by ending deflation and stabilizing the financial system. "The availability and effectiveness of traditional policy instruments is very limited because the policy interest rate is actually zero, and the nominal interest rate can not be negative (zero limit issue)."
In response to deflationary pressures, the Bank of Japan, in coordination with the Ministry of Finance, launched a backup targeting program. The BOJ increased the balance of commercial bank accounts to ¥ 35 trillion. Furthermore, the Ministry of Finance uses the funds to buy $ 320 billion in US government bonds and agency debt.
In 2014, criticism of Japanese currency intervention confirms that Japan's central bank is artificially and deliberately devaluing the yen. Some countries claim that the US-Japan trade deficit 2014 - $ 261.7 billion - is an increase in unemployment in the United States. Bank of Korea Governor Kim Choong Soo has urged Asian countries to work together to defend themselves against the side effects of Japan's Prime Minister Shinzo Abe's reflation campaign. Some people (who?) Declare this campaign in response to Japan's stagnant economy and the potential for deflationary spirals.
In 2013, Japanese Finance Minister Taro Aso said Japan plans to use its foreign exchange reserves to buy bonds issued by the European Stability Mechanism and the euro zone rulers, to weaken the yen. The US criticized Japan for selling unilateral yen in 2011, after the Group of Seven economies jointly intervened to weaken the currency after the earthquake and tsunami that year.
In 2013, Japan had $ 1.17 trillion of foreign exchange reserves, according to ministry data.
Chinese Yuan
In the 1990s and 2000s, there was a sharp increase in imports of Chinese goods by Americans. China's central bank allegedly devalued the yuan by buying large sums of US dollars with the yuan, thus increasing the supply of the yuan in the foreign exchange market, while increasing demand for the US dollar, thus increasing the price of the USD. According to an article published in KurzyCZ by Vladimir Urbanek, in December 2012, China's foreign exchange reserves have about $ 3.3 trillion, making it the world's highest foreign exchange reserve. About 60% of this reserve consists of US government bonds and bonds.
There is much disagreement about how the United States should respond to China's yuan devaluation. This is partly due to disagreements over the actual effects of the less appreciated yuan on capital markets, trade deficits, and the US domestic economy.
Paul Krugman argued in 2010 that China deliberately devalued its currency to increase its exports to the United States and as a result expanded its trade deficit with the United States. Krugman suggested at the time that the United States should impose tariffs on Chinese goods. Krugman states:
A more depreciated Chinese exchange rate - the higher the dollar price in the yuan - the more dollars China earns from exports, and the fewer dollars spent on imports. (The capital flow complicates the story a bit, but does not change it in any fundamental way). By maintaining its current artificial weakness - higher dollar prices in terms of yuan - China produces a dollar surplus; this means the Chinese government must buy excess dollars.
Greg Mankiw, on the other hand, asserted in 2010 that US protectionism through tariffs would cost the US economy far more than China's devaluation. Similarly, others claim that too low a yuan has actually harmed China in the long run to the extent that the overly low yuan do not subsidize Chinese exporters, but subsidize American importers. Thus, importers in China have been substantially injured because of the Chinese government's intention to continue to increase exports.
The view that China manipulates its currency for its own profit in trade has been criticized by Cato Institute's fellow trade policy study Daniel Pearson, National Press Taxpayer Policy and Government Affairs Manager Clark Packard, entrepreneur and Forbes contributor Louis Woodhill, Henry Kaufman Professor of Financial Institutions at Columbia University Charles W. Calomiris, Ed Dolan economist William L. Clayton Professor of International Economic Affairs at Fletcher School, Tufts University Michael W. Klein, Harvard University Kennedy School of Government Professor Jeffrey Frankel, Bloomberg columnist William Pesek, quartz reporter Gwynn Guilford, The Wall Street Journal Digital Network Editor-In-Chief Randall W. Forsyth, United Courier Services, and China Learning Curve.
Russian Ruble
On November 10, 2014, the Russian Central Bank decided to completely float the ruble in response to the largest weekly decline in 11 years (a decline of about 6 percent against the USD). Thus, the central bank abolished the double currency trading bands where the ruble was previously traded. The central bank also ended routine interventions that had previously restricted sudden movements in currency values. The previous move to raise interest rates by 150 basis points to 9.5 percent failed to halt the fall of the ruble. The central bank sharply adjusts its macroeconomic forecasts. It states that Russia's foreign reserves, the fourth largest in the world at around $ 480 billion, are expected to fall to $ 422 billion by the end of 2014, $ 415 billion by 2015, and below $ 400 billion by 2016, in an effort to shore up until the ruble.
On December 11, Russia's central bank raised interest rates by 100 basis points, from 9.5 percent to 10.5 percent.
The decline in oil prices and economic sanctions imposed by the West in response to Russia's Crimea annexation led to a worsening Russian recession. On December 15, 2014, the ruble fell as much as 19 percent, the worst one-day decline for the ruble in 16 years.
The Russian central bank's response is twofold: first, continue to use Russia's large foreign currency reserves to buy a ruble on the forex market to keep its value through artificial demand on a larger scale. In the same week as the Dec. 15 decline, the Russian central bank sold an additional $ 700 million in foreign currency reserves, in addition to the nearly $ 30 billion spent over the previous few months to prevent a decline. The Russian reserves then settled at $ 420 billion, down from $ 510 billion in January 2014.
Secondly, increase interest rates dramatically. The central bank raised its key interest rate by 650 basis points from 10.5 percent to 17 percent, the biggest increase in the world since 1998, when Russian interest rates jumped beyond 100 percent and the government failed to pay its debts. The central bank expects higher interest rates to provide incentives to the forex market to maintain the ruble.
From 12 to 19 February 2015, Russia's central bank spent an additional $ 6.4 billion in reserves. Russia's foreign exchange reserves at this point reached $ 368.3 billion, well below the central bank's forecast for 2015. Since the fall of global oil prices in June 2014, Russian reserves have fallen more than $ 100 billion.
When oil prices stabilize in February-March 2015, the ruble is also stable. Russia's central bank has cut its benchmark interest rate from 17 percent to 15 percent today in February 2015. Russia's foreign exchange reserves currently stand at $ 360 billion.
In March and April 2015, with the stabilization of oil prices, the ruble has made a surge, which the Russian authorities have perceived as a "miracle". Over three months, the ruble rose 20 percent against the US dollar, and 35 percent against the euro. The ruble is the best-performing currency of 2015 in the forex market. Although far from the pre-recession level (in January 2014, 1 USD matched about 33 Russian rubles), it is currently trading at about 52 rubles to 1 USD (increase in value from 80 rubles to 1 USD in December 2014).
Currently Russia's foreign reserves are at $ 360 billion. In response to the surge in the ruble, Russia's central bank lowered its main interest rate to 14 percent in March 2015. The recent ruble gains are largely accredited for stabilizing oil prices and calming the conflict in Ukraine.
See also
- Open market operations
- Quantitative Savings
- UK Exchange Equality Account
- United States Exchange Stabilization Fund
References
Source of the article : Wikipedia
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