Web Trader MT5
A direct intervention when a central bank directly buys or sells its own currency on the foreign exchange market in an effort to influence the exchange rate. Most big central banks say they target excessive volatility, not specific rate levels, but the line between the two quickly thins when a move gets fast and disorderly.
Two flavors. Sterilized intervention offsets the domestic monetary effect. The bank buys FX and, at the same time, sells domestic bonds. The money supply stays the same. Unsterilized intervention allows the transaction to influence the money supply. Sterilized operations are often less durable since they do not change the underlying rate differential that drives the move.
But verbal intervention, where officials talk about currency levels without actually trading, is cheaper and sometimes just as effective if markets believe the threat is credible. Interventions are best suited to smooth out disorderly conditions, not reverse a fundamentally driven trend. Eventually, a central bank that is trying to prop up a structurally overvalued currency will exhaust its reserves.
Example: Major Asian currency breaks through a psychologically important level in thin overnight trading. The central bank steps in and sells USD reserves to pull the rate back. The morning session has brought the market to a calm. Officials issue a brief statement calling the move disorderly and not reflective of economic fundamentals
