Governments That Intervened in the Currency Market Recently

Nowadays, most foreign currencies are free-floating, where supply and demand determine their value without any manipulation from a central authority. 

Yet, many governments have intervened in the foreign exchange (forex or FX) market for many reasons, often resulting in dramatic price shifts.

About Government Intervention in the Forex Market

Many modern currencies use a free-floating currency model, a trend that began in the early 70s following the end of the Bretton Woods system.

The popular floating currency markets include EUR/USD (euro), GBP/USD (British pound), JPY/USD (Japanese yen), and CHF/USD (Swiss franc). Generally, floating exchange rates are suitable for the first-world countries of these respective currencies, given their already established monetary policies.

However, it may be surprising to learn that their central banks have intervened over the years. But why? Governments or central banks can step in to make monetary changes for various reasons.

A country may rely heavily on exports from another nation. Yet, its currency could be too strong for the latter country to afford its goods. So, intentionally weakening the domestic currency would make exports more attractive or cheaper for foreigners. Alternatively, a stronger domestic currency would reduce the prices of imports.

Governments can weaken or strengthen their domestic currency through foreign currency reserves. So, they can sell the reserves to buy their own currency (increasing its value) or purchase the reserves to sell their own currency (decreasing its value).

Interest rates are also another monetary tool with huge significance in currency valuations. Generally, a central bank decreases or keeps a low-interest rate to stimulate the economy. Meanwhile, a hike in the rates is primarily necessary to control inflation.

Prominent Examples of Government Intervention

Let's look at the currencies where government or central intervention has been the most significant.

Japanese Yen

Japan has long struggled with deflation (the opposite of inflation) and wage stagnation, a stark contrast to its first-world counterparts. In the early 1980s, the Land of the Rising Sun boasted interest rates as high as 9%, which dropped to 4.25% by 1990.

The Bank of Japan (BoJ) slowly dropped the yen's interest rate throughout the 90s, reaching 0% by 1999. This latter percentage remained for most of the 2000s and from 2010 until February 2016, when it was one of the few to use a negative interest rate policy (–0.1% rate). The central bank maintained a –0.1% interest rate until April 2024, when it raised it to 0.1%.

The Japanese government has also intervened in many other ways within the forex market, such as through the multi-trillion trading of the yen and other campaigns. Due to the country's long-standing mediations, this currency is currently among the weakest highly developed economies.

Swiss Franc

The most dramatic intervention for the Swiss happened in January 2015, leading to the greatest 'flash crash' in forex. Switzerland shares a strong exporting relationship with nations in the European Union.

Yet, the euro began depreciating noticeably against the Swiss franc following the end of the 2007–08 financial crisis. It had dropped 36% by September 2011. The consequences were a decline in exports to EU nations—a considerable blow to Switzerland's export-heavy economy.

The Swiss National Bank (SNB) took action, pegging the Swiss franc at 1.2000 to the euro. However, the SNB needed to print a massive amount of Swiss francs and keep a substantial amount of euro reserves. The latter reached about $480 billion (roughly 70% of the country's Gross Domestic Product at the time) by the end of 2014.

This system was unsustainable due to the euro's depreciation in forex. January 15, 2015, was the historic, shocking day when the SNB suddenly announced they would drop the peg. The Swiss franc soared immediately in value against many other foreign currencies, with the euro dropping about 40% in value against it.

Interestingly, the Swiss government began using negative interest rates a month before 2015, keeping a steady –0.75% until June 2022. It made headlines when it raised the figure to –.0.25%, boosting it to the present-day 1.5%.

Chinese Renminbi

China became an economic powerhouse partly due to the manipulation of its currency, the Renminbi. The Chinese government pegged the Renminbi to the US dollar between 1997 and 2005.

Nine years later, China significantly devalued the Renminbi against the US dollar. Again, it goes back to exports. The People's Bank of China (PBoC) made the Renminbi as weak as possible to make Chinese exports cheaper.

Of course, this requires a central bank to hold substantial forex reserves. According to Trading Economics, this figure is $3.24 trillion, the highest globally and comprising a large portion of the US dollar.

Intriguingly, the tides have turned since 2014, and the greenback has gradually become more valuable against the Renminbi. This demonstrates the opposite moves of the Fed and PBoC, where one has increased its interest rate while the other has dropped it.

Final Word: Taking Advantage of Government Intervention in Forex

The first takeaway is that governments and central banks can affect currencies to varying degrees. Many of these organizations have achieved their monetary policy goals with minimal consequences to their respective currencies. Yet, rare cases exist with administrations from nations like Japan, Switzerland, and China.

Understanding the activities of governments and central banks forms part of fundamental analysis in forex. Traders can use this information and other economic indicators to make informed decisions with lucrative potential.