Currency Intervention

The concept of currency

Before disclosing what is "foreign exchangeintervention ", it is necessary to clarify the very concept of currency. The term "currency" comes from the Italian "valuta", which translates into Russian as "value, price". Currency - a monetary unit of a specific country, established by law. Also, currency is understood as money signs, payment and credit documents of foreign countries, which are used in international economic exchange and other international relations.

In terms of metal currency circulationcurrencies were represented by exchangeable gold for national credit money. After stopping the exchange procedure for precious metals, the national currencies became "paper".

Currency Interventions

Currency intervention is the operation of the centralissuing bank, which consist in buying or selling the currency of their country to maintain its course. Also, this concept includes targeted transactions related to the purchase and sale of foreign currency, the purpose of which is to limit the dynamics of the currency's exchange rate by certain limits of its reduction or increase. The purpose of the intervention is to regulate the exchange rate to a specific level.

The exchange rate is the value ratio of the two currencies in the exchange. Its regulation is necessary, that under the existing course, the state's economy develops better.

To maintain or increase the exchange rateThe central bank sells foreign currency for national currency, and to reduce its rate, it purchases foreign (primarily US dollars) in exchange for national currency. It should be noted that foreign exchange interventions are forced measures. They are not held often: on average, one year, one currency intervention is conducted by one country. However, minor intervention by the Central Bank in the dynamics of the exchange rate can occur more often.

Types of intervention

1. Real. It is carried out openly. In this process, the bank independently or through representatives begins buying up lots in the market. After the operation is completed, the results and specific volumes are published.

2. Fictitious. Such an intervention occurs if there are reports of a possible operation in different sources, but the operation itself is not carried out yet. Fictitious intervention is of a short-term nature. It has much less influence on the rate of increase than the actual intervention.

Currency Intervention in Russia

In Russia this term is used, as a rule,together with the tasks of maintaining the exchange rate of the ruble against the US dollar. The Central Bank of Russia sells US dollars to prevent the domestic currency from falling in the foreign exchange market, and then to affect the purchasing power of the national currency, exchange rates and the economy of the country. But it is worth noting that with significant violations of the balance of payments system, this process can lead to a significant depletion of the foreign exchange reserve.

Is it possible to forecast an intervention?

In order to predict intervention, it is necessaryor seriously listen to all the speeches of politicians and economic figures who warn of the intentions of the Central Bank, or to analyze in detail all the statistical reports.

How long does the process last?

As a rule, currency intervention takes fromtwo to five hours. The strongest movements are carried out in the first two to three hours. Then the price can continue to grow by inertia. After the inertial growth, a pullback is observed, where the price will be adjusted to the new conditions.

Thus, the market is aself-regulatory mechanism, but government intervention is necessary to "adjust" exchange rates. Currency intervention allows the country's economy to develop more efficiently.