FX Primer: FX intervention primer: G10

Research evidence excerpt

FX Primer: FX intervention primer: G10

FX intervention is the operation of transacting in currency markets by the official sector

for economic policy purposes. Countries across the developed, developing, and

emerging world take on a variety of approaches to FX policy, ranging from fully floating

to fully pegged. While official intervention is much more commonplace in smaller and/or

emerging market economies, it is used quite infrequently in most G10 countries. The

scope for this primer is centered on the G10, with an emphasis on US FX policy, a closer

look at FX policy in Japan and Switzerland (two of the more active G10 economies), and

the implications of FX intervention on the US Treasury market.

Exhibit 1: USD Real Effective Exchange Rate

G7 (&US) interventions rare in the post-Bretton Woods era

Plaza Accord Louvre G7 EUR G7 JPY Official end of

140 (USD Sale) purchase Sale

100 Accord (USD

purchase)

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Source: Bruegel; BofA Global Research

BofA GLOBAL RESEARCH

Purpose of FX intervention (US

perspective)

FX interventions in the US are rare, with only two such operations having occurred this

century (see below: “US Intervention: A brief and recent history”). As such, when FX

market conditions warrant even an uptick in possible US intervention speculation, it is

quite noteworthy. In general, intervention by the US monetary authorities would likely

be associated with one or more of the following interrelated market backdrops.

Excessive volatility

This is arguably the most justifiable rationale for FX intervention. Even when multiple

factors are at play (say, undesirable FX levels), the pace of moves can be disruptive to

the flow of capital, impede business decisions, and otherwise elevate economic and