March 2012 issue contents
The Federal Reserve as an Informed Foreign Exchange Trader: 1973-1995

by Michael D. Bordoa, Owen F. Humpageb, and Anna J. Schwartzc


If official interventions convey private information useful for price discovery in foreign exchange markets, then they should have value as a forecast of near-term exchange rate movements. Using a set of standard criteria, we show that approximately 60 percent of all U.S. foreign exchange interventions between 1973 and 1995 were successful in this sense. This percentage, however, is no better than random. U.S. intervention sales and purchases of foreign exchange were incapable of forecasting dollar appreciations or depreciations. U.S. interventions, however, were associated with more moderate dollar movements in a manner consistent with leaning against the wind, but only 22 percent of all U.S. interventions conformed to this pattern. We also found that the larger the size of an intervention, the greater was its probability of success. In this context, most U.S. interventions appear to have been too small to have had a high probability of success. Other potential characteristics of intervention-notably, coordination and secrecy-did not seem to influence our success rates.

JEL Codes: F31, E52, E58.

Full article (PDF, 33 pages 278 kb)

Discussion by Kathryn Dominguez

a Rutgers University 
b Federal Reserve Bank of Cleveland 
c National Bureau of Economic Research