Intervention is making a comeback in the currency markets. For most of this decade, the world’s major central banks refrained from entering the markets. The most recent prominent unilateral intervention was by the Bank of Japan in 2004 and the most recent coordinated intervention was in 2000 to support the euro. Strong growth, buoyant exports and low foreign exchange volatility gave policymakers little reason to intervene.

But two years of credit crunch and global recession have made currency markets highly volatile, inducing policymakers to react to record swings. The Swiss National Bank has been unilaterally selling the franc against the euro and the dollar for the first time in almost two decades. The Reserve Bank of Australia has been selling the Australian dollar in the largest size for five years. The Bank of England has been buying gilts from foreign investors in the hope that the pound will weaken if they repatriate their proceeds. The Riksbank has been rebuilding its foreign exchange reserves to the detriment of the Swedish krona, and the European Central Bank, the Bank of Japan, the Bank of Canada and the Reserve Bank of New Zealand have all warned the currency markets about the strength of their exchange rates.