Forex market intervention
The foreign exchange market intervention is market regulation , in which central banks on the foreign exchange market as a buyer or seller of foreign exchange for the purpose of influencing the exchange rate occur.
General
In addition to interest rate policy , foreign exchange market interventions are the only directly effective economic policy instrument within the framework of monetary policy for influencing the foreign exchange market. In fixed exchange rate regimes in particular , foreign exchange market interventions are mandatory as soon as the internationally established exchange rate ranges are reached by the exchange rates that actually arise . Foreign exchange market interventions then ensure that the exchange rate ranges are adhered to. Such frequent interventions were seen as an indicator of a later appreciation or depreciation of foreign currencies .
history
When the International Monetary Fund (IMF) set the first exchange rate parity for Germany at DM 3.33 = US $ 1 in May 1949 , it also created fixed exchange rate ranges for the other IMF member states within which the exchange rate could fluctuate freely. Threatened by the market development of the fixed upper support point exceeded or are fallen below the lower, central banks affected by sales or, in the had to market events in the currency market intervene.
In March 1961 the exchange rate parity sank by the first revaluation of the DM to 4.00 DM, the second DM revaluation followed in October 1969 to DM 3.66, a third in December 1969 to DM 3.22. In October 1968, the constant downward pressure on the US dollar made it necessary for the Deutsche Bundesbank to stop its foreign exchange market interventions . The previous heterogeneous economic development of the western industrialized countries made it impossible to stick to this system of fixed exchange rates because the central banks had to intervene more and more frequently. Strong export nations like Germany tended to be suspected of revaluation, countries with a negative trade balance like the USA were potentially at risk of devaluation. Countries suspected of revaluation increased their currency reserves through constant foreign exchange purchases, states at risk of devaluation lost their foreign currency reserves. Fixed exchange rates were first eased on September 30, 1969. The internationally agreed adjustment of exchange rate parities in December 1971 ( Smithsonian Agreement ) and the dollar devaluation by 10% in February 1973 were attempts to save the parity system. In a televised address on August 15, 1971, US President Richard M. Nixon unilaterally denounced the IMF's Bretton Woods Agreement . On 17./18. December 1971 an agreement was made on the reorganization of exchange rates through so-called central rates as part of the Smithsonian Agreement . It was a matter of increasing the bandwidths from ± 1% to ± 2.25%.
Foreign exchange market interventions by the central banks also took place during the era of freely fluctuating exchange rates ( "floating" ) from March 1973 and were regarded as massive market regulation through operational interventions in the market to stabilize exchange rates .
Obligation to intervene
The IMF agreement obliged the IMF member states to strictly adhere to the agreed exchange rate range. This happened through the intervention of the central banks, which intervened in the market as foreign exchange buyers or sellers. For this purpose, there were two intervention points, which were above and below the mean spot exchange rate and were therefore called the upper and lower intervention point. The respective central bank had to buy the reserve currency by intervening in the foreign exchange market when the current exchange rate reached the lower intervention point and sell it as soon as the daily rate reached the upper intervention point due to market developments . Through this artificial demand or this artificial supply , falling below the lower and exceeding the upper intervention point could be prevented, which led to changed market data (foreign exchange spot rates). However, these interventions had a huge impact on the money market because the central bank's foreign exchange purchases resulted in an undesirable increase in the money supply and vice versa.
Effects
The exchange rate changes caused by foreign exchange market interventions also have an impact on a country's inflation development , for example : a devaluation of the domestic currency leads to an increase in the inflation rate . An appreciation has the opposite effect. A devaluation of the local currency leads to an increase in exports . Exports increase while imports decrease, creating inflation ( macroeconomic equilibrium ).
They also have a direct impact on the competitiveness of domestic companies: A devaluation of the domestic currency leads to a fall in the world market prices of domestic providers. A devaluation consciously brought about for these reasons is referred to as competitive devaluation or, more generally, “making your neighbor a beggar” ( English Beggar-thy-Neighbor ).
Todays situation
Due to the complete suspension of exchange rate bands, foreign exchange market interventions by central banks are now voluntary. In the absence of any agreements or general guidelines, the Eurosystem may decide to intervene in foreign exchange markets as necessary. The Eurosystem can carry out such interventions either alone ( unilateralism ) or as part of a coordinated intervention with other central banks ( multilateralism ). Interventions can then be carried out either directly by the ECB or by the national central banks as an “open proxy” for the ECB. The ECB's ability to intervene in the foreign exchange market is not restricted by its currency reserves.
In the context of not entirely flexible exchange rate regimes, foreign exchange market intervention is almost essential. They are therefore carried out in a number of countries - for example, under the European Exchange Rate Mechanism II (ERM II), which pegs a number of countries with fixed exchange rates to the euro .
In many Asian countries (e.g. PR China and Japan ), foreign exchange market interventions are among the basic economic policy instruments. There the interventions are used to keep the external value of the domestic currency low and thus the competitiveness of the country high. For example, China is buying B. constantly US government bonds to achieve a constant dollar demand and to keep its value constant. Since the renminbi is pegged to the US dollar , it does not appreciate or fall if the dollar holds its value.
The US central bank, the Fed , is rather hesitant to use this instrument (also by the ECB, with the exception of ERM II), because above all the sustainable influence of exchange rates in globalization seems hardly financeable. Coordinated intervention by several central banks to stabilize a currency still seems conceivable, however, if this can safeguard the trade relations and economic stability of all countries involved and if the central bank councils see a weakening or overvaluation of individual currencies being of a temporary nature.
Individual evidence
- ↑ Bernd Engel / Hans Herber, Economics for Studies and Banking Practice , 1983, p. 252
- ^ Ernst Baltensperger / Werner Ehrlicher / Rudolf Richter, Problems of Monetary Policy , 1981, p. 9
- ↑ European Central Bank of May 29, 2008, Foreign Exchange Operations