Currency interventions — here to stay?

Marco Giordano, Investment Director
4 min read
2025-06-30
Archived info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
1352271307

The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed.

At time of writing, investors and market commentators are focused on the impact of (still) high inflation and subsequent monetary policy decisions on bond markets but they appear to have overlooked the potential consequences for currency risk. Yet, in our view, the new economic era we have entered entails not only more uncertainty and volatility in interest rates but also greater fluctuations in exchange rates. Hence, we believe understanding currency moves and how they impact economies can be an important asset in navigating increasingly volatile markets. 

The growing risk of currency intervention

Currency intervention is a monetary policy action taken to moderate the pace or extent to which a currency appreciates or depreciates. This is done by changing the supply of the local currency and actively buying or selling foreign currencies at scale to reach the desired exchange rate. It is most often undertaken when the level of the local currency exchange rate is deemed to have moved out of alignment with underlying economic fundamentals. Policymakers buy or sell national reserves to stabilise the economy and control inflation by putting a stop to what is perceived to be excessive currency strengthening or weakening. While the line between currency intervention and manipulation can sometimes be blurred, large-scale interventions generally aim to address a broadly recognised imbalance in markets and often involve international cooperation or agreement. Occasionally, however, governments are accused of outright manipulation, attempting to unofficially distort the value of their currency to achieve a specific economic objective, most notably to (re)gain competitiveness in global markets and boost exports.

Lessons from the past
To be clear, intervention by policymakers to prop up or strategically devalue a currency is not new. As an example, in 1992, the UK withdrew sterling from the European Exchange Rate Mechanism (ERM) in a bid to stop speculative selling of the currency (an event known as “Black Wednesday”). At the time, the UK was slowly emerging from a steep recession caused by factors such as low competitiveness, high inflation and persistent current account deficits. However, policymakers kept interest rates high to prop up the value of sterling. When market participants became concerned that the currency’s exchange rate did not reflect these weaknesses, the monetary authorities responded with further rate hikes and then large-scale currency interventions. When these rate hikes and interventions became unsustainable, the UK abandoned the ERM, prompting a large-scale devaluation (Figure 1). While a brutal shock, it ultimately increased the UK’s competitiveness in global markets and spurred economic growth. 

Figure 1
currency-interventions-here-fig

Similarly, other ERM currencies, most notably the Italian lira and Spanish peseta, went through various rounds of devaluations against the German mark, enabling them to maintain export competitiveness. And back in the 1980s, the G7 countries sought a strategic devaluation of the US dollar through coordinated efforts (the Plaza and Louvre Accords), with the aim of addressing major imbalances in the global economy.

What does this mean for investors?

Since the introduction of the euro, active currency intervention has mostly occurred in emerging markets, most notably in Argentina and Turkey. Among developed economies, the use of active currency management has been limited to Switzerland, as the safe-haven status of the Swiss franc has, at times, posed a risk for the Swiss economy and the effectiveness of its monetary policy. 

However, intervention has become more frequent in the last two years. We have seen Japan’s Ministry of Finance step into markets with tens of billions of US dollars to shore up the value of the Japanese yen while the Chinese authorities appear to be allowing the renminbi to float more freely in global markets in an attempt to devalue the currency and improve competitiveness. There has even been speculation that some Trump advisers are in favour of including currency intervention in the US government’s economic toolkit, should the Republican Party regain control of the administration. While on the surface implausible, such a move would be bold and unprecedented in recent history.

The inevitable conclusion is that once a critical mass of countries engage in active currency manipulation, a sort of prisoner’s dilemma ensues: there is no advantage in not taking part. This has potentially significant implications for investors and allocators:

  • Investments in global fixed income markets can continue to provide significant benefits in an environment of higher currency volatility, including diversification from domestic markets. In this context, increased currency volatility needn’t be only a risk to hedge. It can present opportunities for consistent alpha generation too.
  • Equity investors without a hedging programme may find their gains eroded in the event of significant currency moves.
  • The disintermediation of the US dollar as the global reserve currency seems unlikely for now but is an increasing tail risk.

Expert

Related insights

Showing of Insights Posts
Archived info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.

Reframing fixed income portfolios: why bond maths makes the difference

Continue reading
event
5 min
Article
2025-06-30
Archived info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
Archived info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.

Looking beyond yield: Rethinking the approach of fixed income investing

Continue reading
event
5 min
Article
2025-05-31
Archived info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
Archived info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.

New era demands a nimble approach to credit

Continue reading
event
5 min
Article
2025-05-31
Archived info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
Archived info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.

Chart in Focus: Compelling opportunities in four higher-yielding credit sectors

Continue reading
event
Quick Take
2025-03-11
Archived info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
Archived info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.

Three ways to elevate your portfolio in 2024

Continue reading
event
Article
2026-01-31
Archived info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
Archived info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.

Credit: Better opportunities to add risk on the horizon

Continue reading
event
Article
2024-12-31
Archived info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
Archived info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.

Chart in Focus: Cash vs. bond returns in rate hiking cycles

Continue reading
event
Quick Take
2024-08-31
Archived info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.

Read next

Past results are not necessarily indicative of future results and an investment can lose value. Funds returns are shown net of fees. Source: Wellington Management

© 2024 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The Overall Morningstar Rating for a fund is derived from a weighted average of the three, five, and ten year (if applicable) ratings, based on risk-adjusted return. Past performance is no guarantee of future results. 

The content within this page is issued by Wellington Management Singapore Pte Ltd (UEN: 201415544E) (WMS). This advertisement or publication has not been reviewed by the Monetary Authority of Singapore. Information contained on this website is provided for information purposes and does not constitute financial advice or recommendation in any security including but not limited to, share in the funds and is prepared without regard to the specific objectives, financial situation or needs of any particular person.   

Investment in the funds described on this website carries a substantial degree of risk and places an investor’s capital at risk.  The price and value of investments is not guaranteed. The value of the shares of the funds and the income accruing to them, if any,  and may fall or rise. An investor may not get back the original amount invested and an investor may lose all of their investment. Investment in the funds described on this website is not suitable for all investors. Investors should read the prospectus and the Product Highlights Sheet of the respective fund and seek financial advice before deciding whether to purchase shares in any fund. Past performance or any economic trends or forecast, are not necessarily indicative of future performance. Some of the funds described on this website may use or invest in financial derivative instruments for portfolio management and hedging purposes. Investments in the funds are subject to investment risks, including the possible loss of the principal amount invested. None of the funds listed on this website guarantees distributions and distributions may fluctuate and may be paid out of capital. Past distributions are not necessarily indicative of future trends, which may be lower. Please note that payment of distributions out of capital effectively amounts to a return or withdrawal of the principal amount invested or of net capital gains attributable to that principal amount. Actual distribution of income, net capital gains and/or capital will be at the manager’s absolute discretion. Payments on dividends may result in a reduction of NAV per share of the funds. The preceding paragraph is only applicable if the fund intends to pay dividends/ distributions.  Performance with preliminary charge (sales charge) is calculated on a NAV to NAV basis, net of 5% preliminary charge (initial sales charge). Unless stated otherwise data is as at previous month end. 

Subscriptions may only be made on the basis of the latest prospectus and Product Highlights Sheet, and they can be obtained from WMS or fund distributors upon request.  

This material may not be reproduced or distributed, in whole or in part, without the express written consent of Wellington Management.