Is Official Exchange Intervention Effective

Many governments have intervened in foreign-exchange markets to try to dampen volatility and to slow or reverse currency movements. Their concern is that excessive short-term volatility and long-term swings in exchange rates may hurt their economy, particularly sectors heavily involved in international trade. And the foreign-exchange market certainly has been volatile recently. For example, one euro cost about $1.15 in January 1999, dropped to only $0.85 by the end of 2000, and climbed to over $1.18 by March 2003. Over this same period, one US dollar bought as much as 133 Japanese yen and as little as ¥102, a 30 percent fluctuation. Many other currencies have also experienced similarly large price swings in recent years.

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