DEFINITION of Unsterilized Foreign Exchange Intervention

An unsterilized foreign exchange intervention is a method by which a country's monetary authorities can try to influence a country's exchange rates and its money supply. When there is less of a currency in circulation, the currency strengthens because it is scarce. When there is more of a currency in circulation, the currency weakens because it is plentiful. During an unsterilized foreign exchange intervention, a country will attempt to influence currency strength by purchasing or selling that country's currency. This is a passive approach to exchange rate fluctuations, and allows for fluctuations in the monetary base.

BREAKING DOWN Unsterilized Foreign Exchange Intervention

If the central bank purchases domestic currency by selling foreign assets, the money supply will shrink because it has removed domestic currency from the market; this is an example of a sterilized policy. An unsterilized policy allows for the foreign-exchange markets to function without manipulation of the supply of the domestic currency; therefore, the monetary base is allowed to change.