![HR3004 of 2005 (CHINA Act) Press Conference](https://upload.wikimedia.org/wikipedia/commons/2/26/HR3004_of_2005_%28CHINA_Act%29_Press_Conference.jpg)
Currency intervention, also known as foreign exchange market intervention or currency manipulation, is a
monetary policy
Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often a ...
operation. It occurs when a government or
central bank
A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union,
and oversees their commercial banking system. In contrast to a commercial bank, a central ba ...
buys or sells foreign currency in exchange for its own domestic currency, generally with the intention of influencing the
exchange rate
In finance, an exchange rate is the rate at which one currency will be exchanged for another currency. Currencies are most commonly national currencies, but may be sub-national as in the case of Hong Kong or supra-national as in the case of ...
and trade policy.
Policymakers may intervene in
foreign exchange market
The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all aspec ...
s in order to advance a variety of economic objectives: controlling inflation, maintaining competitiveness, or maintaining financial stability. The precise objectives are likely to depend on the stage of a country's development, the degree of financial market development and international integration, and the country's overall vulnerability to shocks, among other factors.
The most complete type of currency intervention is the imposition of a
fixed exchange rate
A fixed exchange rate, often called a pegged exchange rate, is a type of exchange rate regime in which a currency's value is fixed or pegged by a monetary authority against the value of another currency, a basket of other currencies, or another m ...
with respect to some other currency or to a weighted average of some other currencies.
Purposes
There are many reasons a country's monetary and/or fiscal authority may want to intervene in the
foreign exchange market
The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all aspec ...
. Central banks generally agree that the primary objective of foreign exchange market intervention is to manage the volatility and/or influence the level of the
exchange rate
In finance, an exchange rate is the rate at which one currency will be exchanged for another currency. Currencies are most commonly national currencies, but may be sub-national as in the case of Hong Kong or supra-national as in the case of ...
. Governments prefer to
stabilize the exchange rate because excessive short-term
volatility erodes market confidence and affects both the financial market and the real goods market.
When there is inordinate instability, exchange rate uncertainty generates extra costs and reduces
profits for firms. As a result, investors are unwilling to make investment in foreign financial assets. Firms are reluctant to engage in international trade. Moreover, the exchange rate fluctuation would spill over into the other
financial markets
A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, raw materials and precious metals, which are known in the financial markets ...
. If the exchange rate volatility increases the risk of holding domestic assets, then prices of these assets would also become more volatile. The increased volatility of financial markets would threaten the stability of the financial system and make monetary policy goals more difficult to attain. Therefore, authorities conduct currency intervention.
In addition, when economic conditions change or when the market misinterprets economic signals, authorities use foreign exchange intervention to correct exchange rates, in order to avoid
overshooting of either direction.
Anna Schwartz
Anna Jacobson Schwartz (pronounced ; November 11, 1915 – June 21, 2012) was an American economist who worked at the National Bureau of Economic Research in New York City and a writer for ''The New York Times''. Paul Krugman has said that Schwar ...
contended that the
central bank
A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union,
and oversees their commercial banking system. In contrast to a commercial bank, a central ba ...
can cause the sudden collapse of
speculative excess, and that it can limit growth by constricting the money supply.
Today,
forex
The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all as ...
market intervention is largely used by the central banks of developing countries, and less so by developed countries. There are a few reasons most developed countries no longer actively intervene:
* Research and experience suggest that the instrument is only effective (at least beyond the very short term) if seen as foreshadowing interest rate or other policy adjustments. Without a durable and independent impact on the nominal exchange rate, intervention is seen as having no lasting power to influence the real exchange rate and thus competitive conditions for the tradable sector.
*Large-scale intervention can undermine the stance of
monetary policy
Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money supply, often a ...
.
Developing countries, on the other hand, do sometimes intervene, presumably because they believe the instrument to be an effective tool in the circumstances and for the situations they face. Objectives include: to control inflation, to achieve external balance or enhance competitiveness to boost growth, or to prevent currency crises, such as large
depreciation/appreciation swings.
In a
Bank for International Settlements
The Bank for International Settlements (BIS) is an international financial institution owned by central banks that "fosters international monetary and financial cooperation and serves as a bank for central banks".
The BIS carries out its work thr ...
(BIS) paper published in 2015, the authors describe the common reasons central banks intervene. Based on a BIS survey, in foreign exchange markets "emerging market central banks" use the strategy of "leaning against the wind" "to limit exchange rate volatility and smooth the trend path of the exchange rate".
In their 2005 meeting on foreign exchange market intervention, central bank governors had noted that, "Many central banks would argue that their main aim is to limit exchange rate volatility rather than to meet a specific target for the level of the exchange rate". Other reasons cited (that do not target the exchange rate) were to "slow the rate of change of the exchange rate", "dampen exchange rate volatility", "supply liquidity to the forex market", or "influence the level of foreign reserves".
Historical context
In the
Cold War
The Cold War is a term commonly used to refer to a period of geopolitical tension between the United States and the Soviet Union and their respective allies, the Western Bloc and the Eastern Bloc. The term '' cold war'' is used because the ...
-era United States, under the
Bretton Woods system
The Bretton Woods system of monetary management established the rules for commercial and financial relations among the United States, Canada, Western European countries, Australia, and Japan after the 1944 Bretton Woods Agreement. The Bretto ...
of fixed exchange rates, intervention was used to help maintain the exchange rate within prescribed margins and was considered to be essential to a central bank's toolkit. The dissolution of the Bretton Woods system between 1968 and 1973 was largely due to President Richard Nixon's “temporary” suspension of the dollar's convertibility to gold in 1971, after the dollar struggled throughout the late 1960s in light of large increases in the price of gold. An attempt to revive the fixed exchange rates failed, and by March 1973 the major currencies began to float against each other.
Since the end of the traditional Bretton Woods system, IMF members have been free to choose any form of exchange arrangement they wish (except pegging their currency to gold), such as: allowing the currency to float freely, pegging it to another currency or a basket of currencies, adopting the currency of another country, participating in a currency bloc, or forming part of a monetary union.
The end of the traditional Bretton Woods system in the early 1970s led to widespread but not universal currency management.
From 2008 through 2013, central banks in
emerging market economies (EMEs) had to "re-examine their foreign exchange market intervention strategies" because of "huge swings in capital flows to and from EMEs.
Direct intervention
Direct currency intervention is generally defined as foreign exchange transactions that are conducted by the
monetary authority
In finance and economics, a monetary authority is the entity that manages a country’s currency and money supply, often with the objective of controlling inflation, interest rates, real GDP or unemployment rate. With its monetary tools, a moneta ...
and aimed at influencing the exchange rate. Depending on whether it changes the
monetary base
In economics, the monetary base (also base money, money base, high-powered money, reserve money, outside money, central bank money or, in the UK, narrow money) in a country is the total amount of money created by the central bank. This include ...
or not, currency intervention can be distinguished between non-sterilized intervention and sterilized intervention, respectively.
Sterilized intervention
Sterilized intervention is a policy that attempts to influence the exchange rate without changing the monetary base. The procedure is a combination of two transactions. First, the central bank conducts a non-sterilized intervention by buying (selling) foreign currency bonds using domestic currency that it issues. Then the central bank "sterilizes" the effects on the monetary base by selling (buying) a corresponding quantity of domestic-currency-denominated bonds to soak up the initial increase (decrease) of the domestic currency. The net effect of the two operations is the same as a
swap
Swap or SWAP may refer to:
Finance
* Swap (finance), a derivative in which two parties agree to exchange one stream of cash flows against another
* Barter
Science and technology
* Swap (computer programming), exchanging two variables in t ...
of domestic-currency bonds for foreign-currency bonds with no change in the
money supply
In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include Circulation (curren ...
. With sterilization, any purchase of foreign exchange is accompanied by an equal-valued sale of domestic bonds.
For example, desiring to decrease the exchange rate, expressed as the price of domestic currency, without changing the monetary base, the monetary authority purchases foreign-currency bonds, the same action as in the last section. After this action, in order to keep the monetary base unchanged, the monetary authority conducts a new transaction, selling an equal amount of domestic-currency bonds, so that the total money supply is back to the original level.
Non-sterilized intervention
Non-sterilized intervention is a policy that alters the monetary base. Specifically, authorities affect the exchange rate through purchasing or selling foreign money or bonds with domestic currency.
For example, aiming at decreasing the exchange rate/price of the domestic currency, authorities could purchase foreign currency bonds. During this transaction, extra supply of domestic currency will drag down domestic currency price, and extra demand of foreign currency will push up foreign currency price. As a result, the exchange rate drops.
Indirect intervention
Indirect currency intervention is a policy that influences the exchange rate indirectly. Some examples are
capital controls
Capital controls are residency-based measures such as transaction taxes, other limits, or outright prohibitions that a nation's government can use to regulate flows from capital markets into and out of the country's capital account. These measures ...
(taxes or restrictions on international transactions in assets), and exchange controls (the restriction of trade in currencies). Those policies may lead to inefficiencies or reduce market confidence, or in the case of exchange controls may lead to the creation of a
black market
A black market, underground economy, or shadow economy is a clandestine market or series of transactions that has some aspect of illegality or is characterized by noncompliance with an institutional set of rules. If the rule defines the se ...
, but can be used as an emergency damage control.
Effectiveness
![Argentina trade chart](https://upload.wikimedia.org/wikipedia/commons/b/b7/Argentina_trade_chart.png)
The largest empirical study on effectiveness shows success around 80% when it comes to managing volatility of a currency. A meta-analysis based on 300 different estimations on the effectiveness of the practice show that, on average, a $1 billion dollar purchase depreciates domestic currency in 1%.
Non-sterilization intervention
In general, there is a consensus in the profession that non-sterilized intervention is effective. Similarly to the monetary policy, nonsterilized intervention influences the exchange rate by inducing changes in the stock of the
monetary base
In economics, the monetary base (also base money, money base, high-powered money, reserve money, outside money, central bank money or, in the UK, narrow money) in a country is the total amount of money created by the central bank. This include ...
, which, in turn, induces changes in broader monetary aggregates, interest rates, market expectations and ultimately the exchange rate. As we have shown in the previous example, the purchase of foreign-currency bonds leads to the increase of home-currency money supply and thus a decrease of the exchange rate.
Sterilization intervention
On the other hand, the effectiveness of
sterilized intervention is more controversial and ambiguous. By definition, the sterilized intervention has little or no effect on domestic interest rates, since the level of the money supply has remained constant. However, according to some literature, sterilized intervention can influence the exchange rate through two channels: the portfolio balance channel and the expectations or signaling channel.
;The portfolio balance channel
:In the portfolio balance approach, domestic and foreign bonds are not perfect substitutes. Agents balance their portfolios among domestic money and bonds, and foreign currency and bonds. Whenever aggregate economic conditions change, agents adjust their portfolios to a new equilibrium, based on a variety of considerations, i.e., wealth, tastes, expectation, etc.. Thus, these actions to balance portfolios will influence exchange rates.
;The expectations or signaling channel
:Even if domestic and foreign assets are perfectly substitutable with each other, sterilized intervention is still effective. According to the signaling channel theory, agents may view exchange rate intervention as a signal about the future stance of policy. Then the change of expectation will affect the current level of the exchange rate.
Modern examples
According to the Peterson Institute, there are four groups that stand out as frequent currency manipulators: longstanding advanced and developed economies, such as Japan and Switzerland, newly industrialized economies such as Singapore, developing Asian economies such as China, and oil exporters, such as Russia. China's currency intervention and foreign exchange holdings are unprecedented.
It is common for countries to manage their exchange rate via central bank to make their exports cheap. That method is being used extensively by the emerging markets of Southeast Asia, in particular.
The
American dollar
The United States dollar (symbol: $; code: USD; also abbreviated US$ or U.S. Dollar, to distinguish it from other dollar-denominated currencies; referred to as the dollar, U.S. dollar, American dollar, or colloquially buck) is the official ...
is generally the primary target for these currency managers. The dollar is the global trading system's premier
reserve currency
A reserve currency (or anchor currency) is a foreign currency that is held in significant quantities by central banks or other monetary authorities as part of their foreign exchange reserves. The reserve currency can be used in international tran ...
, meaning dollars are freely traded and confidently accepted by international investors.
System Open Market Account is a
monetary
Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are as ...
tool of the Federal Reserve system that may intervene to counter disorderly market conditions.
In 2014, a number of large
investment bank
Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort.
In finance, the purpose of investing is ...
s, including
UBS
UBS Group AG is a multinational Investment banking, investment bank and financial services company founded and based in Switzerland. Co-headquartered in the cities of Zürich and Basel, it maintains a presence in all major financial centres ...
,
JPMorgan Chase
JPMorgan Chase & Co. is an American multinational investment bank and financial services holding company headquartered in New York City and incorporated in Delaware. As of 2022, JPMorgan Chase is the largest bank in the United States, the ...
,
Citigroup
Citigroup Inc. or Citi (Style (visual arts), stylized as citi) is an American multinational investment banking, investment bank and financial services corporation headquartered in New York City. The company was formed by the merger of banking ...
,
HSBC
HSBC Holdings plc is a British multinational universal bank and financial services holding company. It is the largest bank in Europe by total assets ahead of BNP Paribas, with US$2.953 trillion as of December 2021. In 2021, HSBC had $10.8 tri ...
and the
Royal Bank of Scotland were fined for currency manipulations.
Swiss franc
As the
financial crisis of 2007–08
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fina ...
hit
Switzerland
). Swiss law does not designate a ''capital'' as such, but the federal parliament and government are installed in Bern, while other federal institutions, such as the federal courts, are in other cities (Bellinzona, Lausanne, Luzern, Neuchâtel ...
, the
Swiss franc
The Swiss franc is the currency and legal tender of Switzerland and Liechtenstein. It is also legal tender in the Italian exclave of Campione d'Italia which is surrounded by Swiss territory. The Swiss National Bank (SNB) issues banknotes and the f ...
appreciated "owing to a flight to safety and to the repayment of Swiss franc liabilities funding carry trades in high yielding currencies." On March 12, 2009, the
Swiss National Bank
The Swiss National Bank (SNB; german: Schweizerische Nationalbank; french: Banque nationale suisse; it, Banca nazionale svizzera; rm, Banca naziunala svizra) is the central bank of Switzerland, responsible for the nation's monetary policy an ...
(SNB) announced that it intended to buy foreign exchange to prevent the Swiss franc from further appreciation. Affected by the SNB purchase of euros and US dollars, the Swiss franc weakened from 1.48 against the euro to 1.52 in a single day. At the end of 2009, the currency risk seemed to be solved; the SNB changed its attitude to preventing substantial appreciation. Unfortunately, the Swiss franc began to appreciate again. Thus, the SNB stepped in one more time and intervened at a rate of more than CHF 30 billion per month. By the end of June 17, 2010, when the SNB announced the end of its intervention, it had purchased an equivalent of $179 billion of Euros and U.S. dollars, amounting to 33% of Swiss GDP. Furthermore, in September 2011, the SNB influenced the foreign exchange market again, and set a minimum exchange rate target of SFr 1.2 to the Euro.
On January 15, 2015, the SNB suddenly announced that it would no longer hold the Swiss Franc at the fixed exchange rate with the euro it had set in 2011. The franc soared in response; the euro fell roughly 40 percent in value in relation to the franc, falling as low as 0.85 francs (from the original 1.2 francs).
As investors flocked to the franc during the financial crisis, they dramatically pushed up its value. An expensive franc may have large adverse effects on the Swiss economy; the Swiss economy is heavily reliant on selling things abroad. Exports of goods and services are worth over 70% of Swiss GDP. To maintain price stability and lower the franc's value, the SNB created new francs and used them to buy euros. Increasing the supply of francs relative to euros on foreign-exchange markets caused the franc's value to fall (ensuring the euro was worth 1.2 francs). This policy resulted in the SNB amassing roughly $480 billion-worth of foreign currency, a sum equal to about 70% of Swiss GDP.
''The Economist'' asserts that the SNB dropped the cap for the following reasons: first, rising criticisms among Swiss citizens regarding the large build-up of foreign reserves. Fears of runaway inflation underlie these criticisms, despite inflation of the franc being too low, according to the SNB. Second, in response to the European Central Bank's decision to initiate a
quantitative easing
Quantitative easing (QE) is a monetary policy action whereby a central bank purchases predetermined amounts of government bonds or other financial assets in order to stimulate economic activity. Quantitative easing is a novel form of monetary pol ...
program to combat euro deflation. The consequent devaluation of the euro would require the SNB to further devalue the franc had they decided to maintain the fixed exchange rate. Third, due to recent euro depreciation in 2014, the franc lost roughly 12% of its value against the USD and 10% against the rupee (exported goods and services to the U.S. and India account for roughly 20% Swiss exports).
Following the SNB's announcement, the Swiss stock market sharply declined; due to a stronger franc, Swiss companies would have had a more difficult time selling goods and services to neighboring European citizens.
In June 2016, when the results of the
Brexit
Brexit (; a portmanteau of "British exit") was the withdrawal of the United Kingdom (UK) from the European Union (EU) at 23:00 GMT on 31 January 2020 (00:00 1 February 2020 CET).The UK also left the European Atomic Energy Community (EAEC or ...
referendum were announced, the SNB gave a rare confirmation that it had increased foreign currency purchases again, as evidenced by a rise of commercial deposits to the national bank.
Negative interest rate
An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, th ...
s coupled with targeted foreign currency purchases have helped to limit the strength of the Swiss Franc in a time when the demand for
safe haven currencies is increasing. Such interventions assure the price competitiveness of Swiss products in the
European Union
The European Union (EU) is a supranational political and economic union of member states that are located primarily in Europe. The union has a total area of and an estimated total population of about 447million. The EU has often been des ...
and global markets.
In late 2022, when the
2022 inflation surge trigged significant inflation in Switzerland, the SNB experienced a turn-around in monetary policies. Rather than buying foreign currencies to lower the value of the Swiss franc, the national bank reduced assets in foreign money to curb imported inflation. After massive over-evaluations in 2019 and 2020, the Swiss franc was "no longer over-valued" in relation to other currencies, which allowed the bank to intervene less.
Japanese yen
From 1989 to 2003, Japan was suffering from a long
deflation
In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the value of currency over time, but sudden deflation ...
ary period. After experiencing economic boom, the Japanese economy slowly declined in the early 1990s and entered a deflationary spiral in 1998. Within this period, Japanese output was stagnating; the deflation (negative inflation rate) was continuing, and the unemployment rate was increasing. Simultaneously, confidence in the financial sector waned, and several banks failed. During the period, the Bank of Japan, having become legally independent in March 1998, aimed at stimulating the economy by ending deflation and stabilizing the financial system. The "availability and effectiveness of traditional policy instruments was severely constrained as the policy interest rate was already virtually at zero, and the nominal interest rate could not become negative (the zero bound problem)."
In response of deflationary pressures, the Bank of Japan, in coordination with the Ministry of Finance, launched a reserve targeting program. The BOJ increased the commercial bank current account balance to ¥35 trillion. Subsequently, the MoF used those funds to purchase $320 billion in U.S. treasury bonds and agency debt.
By 2014, critics of Japanese currency intervention asserted that the central bank of Japan was artificially and intentionally devaluing the yen. Some state that the 2014 US-Japan trade deficit — $261.7 billion — was increased unemployment in the United States. Bank of Korea Governor Kim Choong Soo has urged Asian countries to work together to defend themselves against the side-effects of Japanese Prime Minister Shinzo Abe's reflation campaign. Some have (who?) stated this campaign is in response to Japan's stagnant economy and potential deflationary spiral.
In 2013, Japanese Finance Minister Taro Aso stated Japan planned to use its foreign exchange reserves to buy bonds issued by the European Stability Mechanism and euro-area sovereigns, in order to weaken the yen. The U.S. criticized Japan for undertaking unilateral sales of the yen in 2011, after Group of Seven economies jointly intervened to weaken the currency in the aftermath of the record earthquake and tsunami that year.
By 2013, Japan held $1.27 trillion in foreign reserves according to finance ministry data. In 2022, in the context of a dollar apreciation, Japan intervened again on foreign exchange markets.
Qatari riyal
On August 27, 2019, the
Qatar Financial Centre Regulatory Authority, also known as QFCRA, fined the
First Abu Dhabi Bank
First Abu Dhabi Bank (FAB) ( ar, بنك أبوظبي الأول) is the largest bank in the United Arab Emirates. It was formed following a merger between First Gulf Bank (FGB) and National Bank of Abu Dhabi (NBAD).
FAB offers financial solutio ...
(FAB) for $55 million, over its failure to cooperate in a probe into possible manipulation of the
Qatari riyal
The Qatari riyal (sign: QR in Latin, in Arabic; ISO code: QAR) is the currency of the State of Qatar. It is divided into 100 dirhams ( ar, درهم).
History
Until 1966, Qatar used the Indian rupee as its currency, in the form of Gulf rupees. ...
. The action followed a significant amount of volatility in the exchange rates of the Qatari riyal during the first eight months of the
Qatar diplomatic crisis
The Qatar diplomatic crisis was a diplomatic incident in the Middle East that began on 5 June 2017 when Saudi Arabia, the United Arab Emirates, Bahrain and Egypt severed diplomatic relations with Qatar and banned Qatar-registered planes and ship ...
.
In December 2020, ''
Bloomberg News
Bloomberg News (originally Bloomberg Business News) is an international news agency headquartered in New York City and a division of Bloomberg L.P. Content produced by Bloomberg News is disseminated through Bloomberg Terminals, Bloomberg Televi ...
'' reviewed a large number of emails, legal filings and documents, along with interviews conducted with the former officials and insiders of
Banque Havilland
Banque Havilland S.A. is a private bank headquartered in Luxembourg. It is owned by the Rowland family and provides services in private banking, wealth and asset management, fund services to private clients and institutions. Banque Havilland has ni ...
. The observation-based findings showed the extent of services that financier
David Rowland and his private banking service went, in order to serve one of its customers, the Crown Prince of
Abu Dhabi
Abu Dhabi (, ; ar, أَبُو ظَبْيٍ ' ) is the capital and second-most populous city (after Dubai) of the United Arab Emirates. It is also the capital of the Emirate of Abu Dhabi and the centre of the Abu Dhabi Metropolitan Area.
...
,
Mohammed bin Zayed
Sheikh Mohamed bin Zayed Al Nahyan ( ar, مُحَمّد بِن زَايد آل نَهيَان, Moḥamed bin Zāyed Āl Nahyān; born 11 March 1961), colloquially known by his initials as MBZ, is the third president of the United Arab Emirates ...
. The findings showed that the ruler used the bank for financial advice as well as for manipulating the value of the Qatari riyal in a coordinated attack aimed at deleting the country’s
foreign exchange reserves
Foreign exchange reserves (also called forex reserves or FX reserves) are cash and other reserve assets such as gold held by a central bank or other monetary authority that are primarily available to balance payments of the country, influence ...
. One of the five mission statements reviewed by ''Bloomberg'' read, “Control the yield curve, decide the future.” The statement belonged to a presentation made by one of the ex-Banque Havilland analysts that called for the attack in 2017.
Chinese yuan
![CNY-USD v2](https://upload.wikimedia.org/wikipedia/commons/c/c3/CNY-USD_v2.svg)
In the 1990s and 2000s, there was a marked increase in American imports of Chinese goods.
China
China, officially the People's Republic of China (PRC), is a country in East Asia. It is the world's most populous country, with a population exceeding 1.4 billion, slightly ahead of India. China spans the equivalent of five time zones and ...
's
central bank
A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union,
and oversees their commercial banking system. In contrast to a commercial bank, a central ba ...
allegedly devalued yuan by buying large amounts of US dollars with yuan, thus increasing the supply of the yuan in the foreign exchange market, while increasing the demand for US dollars, thus increasing the price of USD. According to an article published in KurzyCZ by Vladimir Urbanek, by December 2012, China's foreign exchange reserve held roughly $3.3 trillion, making it the highest foreign exchange reserve in the world. Roughly 60% of this reserve was composed of US government bonds and debentures.
There has been much disagreement on how the United States should respond to Chinese devaluation of the yuan. This is partly due to disagreement over the actual effects of the undervalued yuan on capital markets, trade deficits, and the US domestic economy.
Paul Krugman
Paul Robin Krugman ( ; born February 28, 1953) is an American economist, who is Distinguished Professor of Economics at the Graduate Center of the City University of New York, and a columnist for ''The New York Times''. In 2008, Krugman was th ...
argued in 2010, that China intentionally devalued its currency to boost its exports to the United States and as a result, widening its trade deficit with the US. Krugman suggested at that time, that the United States should impose tariffs on Chinese goods. Krugman stated:
Greg Mankiw
Nicholas Gregory Mankiw (; born February 3, 1958) is an American macroeconomist who is currently the Robert M. Beren Professor of Economics at Harvard University. Mankiw is best known in academia for his work on New Keynesian economics.
Mankiw ...
, on the other hand, asserted in 2010 the U.S. protectionism via tariffs will hurt the U.S. economy far more than Chinese devaluation. Similarly, others have stated that the undervalued yuan has actually hurt China more in the long run insofar that the undervalued yuan does not subsidize the Chinese exporter, but subsidizes the American importer. Thus, importers within China have been substantially hurt due to the Chinese government's intention to continue to grow exports.
The view that China manipulates its currency for its own benefit in trade has been criticized by
Cato Institute
The Cato Institute is an American libertarian think tank headquartered in Washington, D.C. It was founded in 1977 by Ed Crane, Murray Rothbard, and Charles Koch, chairman of the board and chief executive officer of Koch Industries.Koch Indust ...
trade policy studies fellow Daniel Pearson,
National Taxpayers Union
The National Taxpayers Union (NTU) is a fiscally conservative taxpayer advocacy organization and taxpayers union in the United States, founded in 1977 by James Dale Davidson. NTU says that it is the oldest taxpayer advocacy organization in th ...
Policy and Government Affairs Manager Clark Packard, entrepreneur and Forbes contributor Louis Woodhill, Henry Kaufman Professor of Financial Institutions at Columbia University
Charles W. Calomiris Charles William Calomiris (born November 8, 1957) is an American financial policy expert, author, and professor at Columbia Business School, where he is the Henry Kaufman Professor of Financial Institutions and the Director of Columbia Business Scho ...
, economist Ed Dolan, William L. Clayton Professor of International Economic Affairs at the Fletcher School, Tufts University Michael W. Klein, Harvard University Kennedy School of Government Professor Jeffrey Frankel, Bloomberg columnist William Pesek, Quartz reporter Gwynn Guilford, The Wall Street Journal Digital Network Editor-In-Chief Randall W. Forsyth, United Courier Services, and China Learning Curve.
Russian ruble
On November 10, 2014, the
Central Bank of Russia
The Central Bank of the Russian Federation (CBR; ), doing business as the Bank of Russia (russian: Банк России}), is the central bank of the Russian Federation. The bank was established on July 13, 1990. The predecessor of the bank can ...
decided to fully float the ruble in response to its biggest weekly drop in 11 years (roughly 6 percent drop in value against USD). In doing so, the central bank abolished the dual-currency trading band within which the ruble had previously traded. The central bank also ended regular interventions that had previously limited sudden movements in the currency's value. Earlier steps to raise interest rates by 150 basis points to 9.5 percent failed to stop the ruble's decline. The central bank sharply adjusted its macroeconomic forecasts. It stated that Russia's foreign exchange reserves, then the fourth largest in the world at roughly , were expected to decrease to by the end of 2014, in 2015, and under in 2016, in an effort to prop up the ruble.
On December 11, the Russian central bank raised the key rate by 100 basis points, from 9.5 percent to 10.5 percent.
Declining
oil prices and economic sanctions imposed by the West in response to the Russian annexation of Crimea led to worsening Russian recession. On December 15, 2014, the ruble dropped as much as 19 percent, the worst single-day drop for the ruble in 16 years.
The Russian central bank response was twofold: first, continue using Russia's large foreign currency reserve to buy rubles on the forex market in order to maintain its value through artificial demand on a larger scale. The same week of the December 15 drop, the Russian central bank sold an additional in foreign currency reserves, in addition to the nearly spent over previous months to stave off decline. Russia's reserves then sat at , down from in January 2014.
Second, increase interest rates dramatically. The central bank increased the key interest rate 650 basis points from 10.5 percent to 17 percent, the world's largest increase since 1998, when Russian rates soared past 100 percent and the government defaulted on its debt. The central bank hoped the higher rates would provide incentives to the forex market to maintain rubles.
From February 12 to 19, 2015, the Russian central bank spent an additional in reserves. Russian foreign reserves at this point stood at $368.3 billion, greatly below the central bank's initial forecast for 2015. Since the collapse in global oil prices in June 2014, Russian reserves have fallen by over .
As oil prices began to stabilize in February–March 2015, the ruble likewise stabilized. The Russian central bank has decreased the key rate from its high of 17 percent to its current 15 percent as of February 2015. Russian foreign reserves currently sit at .
In March and April 2015, with the stabilization of oil prices, the ruble has made a surge, which Russian authorities have deemed a "miracle". Over three months, the ruble gained 20 percent against the US dollar, and 35 percent against the euro. The ruble was the best performing currency of 2015 in the forex market. Despite being far from its pre-recession levels (in January 2014, US$1 equaled roughly 33 Russian rubles), it is currently trading at roughly 52 rubles to US$1 (an increase in value from 80 rubles to US$1 in December 2014).
Current Russian foreign reserves sit at $360 billion. In response to the ruble's surge, the Russian central bank lowered its key interest rate further to 14 percent in March 2015. The ruble's recent gains have been largely accredited to oil price stabilization and the calming of conflict in Ukraine.
See also
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Exchange Equalisation Account The Exchange Equalisation Account (EEA) is a fund of His Majesty's Treasury in the United Kingdom. It holds the country's the special drawing rights (SDR) held at the International Monetary Fund as well as reserves of foreign currencies and gold. I ...
in the
United Kingdom
The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and North ...
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Exchange Stabilization Fund The Exchange Stabilization Fund (ESF) is an emergency reserve fund of the United States Treasury Department, normally used for foreign exchange intervention. This arrangement (as opposed to having the central bank intervene directly) allows the US ...
in the
United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
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Open market operation
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Quantitative easing
Quantitative easing (QE) is a monetary policy action whereby a central bank purchases predetermined amounts of government bonds or other financial assets in order to stimulate economic activity. Quantitative easing is a novel form of monetary pol ...
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Forex scandal
The forex scandal (also known as the forex probe) is a 2013 financial scandal that involves the revelation, and subsequent investigation, that banks colluded for at least a decade to manipulate exchange rates on the forex market for their own fi ...
References
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Currency