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.

 

[gwolf666]

Central Bank operational intervention is a fascinating aspect of Forex markets because it highlights how monetary authorities actively shape currency values rather than leaving them entirely to market forces. Essentially, when a central bank steps in to buy or sell its currency, it is pursuing a policy objective, such as stabilizing the exchange rate, controlling inflation, or supporting economic growth. Unlike private traders, the central bank is not focused on profit—it can incur significant losses if needed to achieve its goals.
This type of intervention can create notable market volatility, especially if traders are caught off guard. For instance, sudden large-scale purchases or sales of a currency can trigger sharp short-term movements, which makes it critical for Forex participants to monitor economic announcements, central bank statements, and policy trends. Because these interventions can deplete a country’s foreign reserves, central banks usually deploy them sparingly and strategically, often coordinating with other monetary tools or even with other central banks in extreme cases.