What Is FX Market Intervention — When the Authorities Step In as Rates Get Volatile

FX market intervention is when the monetary authorities (the central bank and government) directly buy and sell foreign exchange to ease sharp movements in the exchange rate.

If the won weakens too quickly, they sell dollars from the foreign exchange reserves and buy won (guiding the won stronger); conversely, if it strengthens too much, they buy dollars. The key is not to "change the direction" of the exchange rate but to "slow the speed," which is why it is often called a "smoothing operation."

Intervention is divided into two kinds according to its effect on the money supply.

Sterilized: to the extent the money supply changed because of the intervention, this method buys and sells domestic bonds to offset that effect. The Bank of Korea issues Monetary Stabilization Bonds (MSBs) to neutralize the impact on the money supply. The idea is to intervene in the exchange rate while not disturbing domestic monetary policy.

Unsterilized: this method leaves the change in the money supply as it is.

In theory, unsterilized intervention has more power to move the exchange rate, but it can conflict with domestic monetary policy, so in practice sterilized intervention is more common.

2022 was a year in which Asian currencies weakened sharply amid a strong dollar. Japan intervened in the FX market unilaterally to counter the abrupt weakening of the yen, and this intervention was in effect sterilized.

Korea, too, undertook considerable intervention in 2022–2023 to defend the won, and in the process its foreign exchange reserves fell from their peak (to about USD 415.6 billion as of the end of 2024, down from a peak of about USD 469.0 billion).

As this shows, intervention consumes the "ammunition" of foreign exchange reserves, so it cannot be used without limit. That is why intervention is a tool for slowing the speed of sharp moves, not an all-powerful means of reversing the market's larger direction.