Operational Intervention

[Tobi]

Another technique that is used by Central Banks to control their currency’s exchange rates is called operational intervention. This is what we usually understand when we use the term Central Bank intervention. Here, the Central Bank actually steps into the market and starts buying and selling currency as per its objective to drive the exchange rate to a particular point. Traders are concerned about Central Bank intervention because the objective of a Central Bank is not to make money trading. They are perfectly content with losing money as long as they can meet their objective! Therefore, an operational intervention can also cause a significant dent in the Forex reserves of the Central Banks. This is the reason, why it is recommended that this policy be sparingly used.