Unsterilized Foreign Exchange Intervention

Watch out! Unsterilized foreign exchange intervention coming through! This is an option when a country’s monetary powers (in the U.S., the central bank or “the Fed” (for “Federal Reserve”) want to tinker with exchange rates of their currency like puppermasters.

How does this work? By changing the supply of money in the market. When there’s less of a currency in circulation, that means lower supply, so a relatively higher demand. When there’s more of a currency in circulation, that means higher supply, so demand goes down.

So what exactly is an unsterilized foreign exchange intervention? It’s when the monetary power sells or buys foreign currency assets to try to influence its currency’s strength. This is considered a passive approach compared to other methods of affecting currency value and exchange rates, and allows for a change in the money in circulation. Round and around we go.