For U.S. policymakers, the ructions in global financial markets present a challenge: Inflation is high and needs taming, but the solution — sharp interest rate increases — is starting to disturb the financial system so much that some analysts warn it could snowball into a bout of serious instability. But the Fed has shown little appetite to change course quickly. It is expected to raise rates again next week, and lift them further later this year and into 2023.
That has led many central banks to take steps to bolster the value of their domestic currency. Central banks hold reserves of foreign currencies and bonds to help protect against sudden or painful declines in the value of their own currency. Typically, these reserves are held in major international currencies like the U.S. dollar, the British pound and the euro.
These reserves have declined this year because most currencies, apart from the dollar, have weakened. Reserves have also shrunk because countries have sold dollars to buy back their own currencies in order to prop them up. Bond prices, too, have fallen because rising interest rates mean that investors can find higher returns elsewhere.
Precise data is hard to come by and varies from country to country, making it difficult to know the full extent of government intervention in currency markets around the world.
In September, the Japanese government spent nearly $20 billion buying its own currency to stem its rapid decline — its first intervention of this sort since 1998. Analysts said the action had reduced some of the volatility in the market, but its effects were short-lived, and the currency has continued to slide.
Last week, the Japanese yen fell to its weakest level against the dollar since 1990, down more than 23 percent for the year, before a brief, sharp snap back. That led to speculation among traders that the government had intervened again. The Japanese government has not provided official confirmation that it did.
South Korea, Taiwan, the Philippines, Vietnam, Malaysia and Thailand have all disclosed currency intervention.