a government or central bank buys or sells a currency in the foreign exchange
market in order to increase or decrease its relative value to other currencies.
Intervention policies vary widely, with some countries, such as Japan, being
more active in the foreign exchange market, and others, such as the U.S., being
in the foreign exchange market less frequently. Historically, the U.S. actively
intervened in the foreign exchange market in order to affect foreign exchange
policy, but since approximately 1990, the general approach has been to let
market forces determine the direction of currencies. However, if the U.S.
believes that one currency is too strong or weak relative to others, it may
intervene. Also, sometimes a foreign government will ask the U.S. to help it
either strengthen or weaken its currency through intervention.
When the U.S. does decide to intervene,
the Department of the Treasury and the Federal Reserve work together.
Typically, the Department of the Treasury decides when to intervene, while the
intervention is carried out by the foreign exchange desk of the Federal Reserve
Bank of New York. Intervention usually is paid for evenly between the Treasury’s
Exchange Stabilization Fund and the Federal Reserve’s System Open Market
Account. Such interventions are typically sterilized, which means that the
expansion or contraction in the monetary supply that resulted from the
intervention is offset by the Federal Reserve’s domestic monetary actions.