When 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.