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Interventions

Government interventions come in all sizes and are launched for various reasons, but they all share one unifying characteristic—they ultimately fail if they are contrary to the long-term trend moving the currency in the first place. Currencies can fluctuate enormously in a short period of time, but they tend to trend in one direction or another unless the economic factor propelling them is changed. However, interventions often cause significant currency movement in a short period of time, so they are enormous opportunities for traders. If a central bank defends its currency, causing it to lurch in one direction, traders can bet that it will eventually resume its course.

Another way to look at interventions is that they are a sign that something in the world economy is out of balance. By the end of the 1980s, Japanese exports had made sizeable inroads in the U.S. economy, partly because the yen traded low against the U.S. dollar, making Japanese imports to the U.S. cheaper than domestic competition. The Japanese government wanted to keep this balance in its favor. By the end of the 1980s, the dollar was again rising, and the Fed decided to intervene to force the dollar lower. Between April 29 and October 12, 1989, it spent more than $10 billion to lower the dollar. The intervention, however, did little. The dollar began to fall only when the Japanese had accumulated so many dollars that they were forced to put them back into circulation. The yen finally rose, and Japanese companies used it to buy American assets.


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