Currency concept
Before disclosing what “currency intervention” is, it is necessary to clarify the very concept of currency. The term "currency" comes from the Italian "valuta", which is translated into Russian as "cost, price." A currency is the monetary unit of a particular country as established by law. Also, currency means banknotes, payment and credit documents of foreign countries, which are used in international economic exchange and other international relations.
In the conditions of metallic money circulation, currencies were represented in exchange for gold national credit money. After the termination of the exchange procedure for precious metals, national currencies became “paper”.
Currency Interventions
Foreign exchange intervention is the operation of a central issuing bank, which consists in buying up or selling the currency of your country to maintain its rate. Also, this concept includes targeted operations related to the purchase and sale of foreign currency, the purpose of which is to limit the dynamics of the exchange rate to certain limits of its decrease or increase. The purpose of the intervention is to regulate the exchange rate at a specific level.
Exchange rate is the value ratio of two currencies during an exchange. Its regulation is necessary so that, given the current course, the state economy will develop better.
To maintain or increase the exchange rate of the monetary unit, the Central Bank sells foreign currency for the national currency, and to reduce its exchange rate, foreign currency (primarily US dollars) is purchased in exchange for the national one. It should be noted that foreign exchange intervention is a necessary measure. They are not carried out often: on average, one country carries out one currency intervention per year. However, minor interventions by the Central Bank in the dynamics of the course may occur more often.
Types of Interventions
1. Real. It is carried out openly. In this process, the bank, on its own or through representatives, begins buying lots on the market. After the operation is completed, the results and specific volumes are published.
2. Fictitious. Such an intervention occurs if messages about a possible operation appear in different sources, but the operation itself has not yet been carried out. Fictitious intervention is short-term. It has a much lesser effect on increasing the course than a real intervention.
Currency intervention in Russia
In Russia, this term is used, as a rule, together with the tasks of maintaining 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 affect the purchasing power of the national currency, exchange rates and the country's economy. 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.
Can intervention be predicted?
To predict the intervention, you must either seriously listen to all the speeches of politicians and economic figures who warn of the Central Bank's intentions, or analyze in detail and thoroughly all statistical reports.
How long does the process take?
As a rule, currency intervention takes from two to five hours. The most powerful movements are carried out in the first two to three hours. Then the price can continue to rise by inertia. After inertial growth, a rollback is observed, where the price will be adjusted for new conditions.
Thus, the market is a self-regulatory mechanism, but government intervention is necessary to “correct” exchange rates. Currency intervention allows the country's economy to develop more efficiently.