The primary objective of Forex intervention is to adjust the volatility or to change the level of the exchange rate. Excessive short-term volatility diminishes market confidence and affects both the financial and the real goods markets.
In case of instability, exchange rate uncertainty results in extra costs and reduction of profits for companies. Investors do not invest in foreign financial assets and firms do not trade internationally. Exchange rate fluctuation affects the financial markets and thereby threatens the financial system. The government’s monetary policy goals become more difficult to attain. In such situations, intervention is necessary.
Moreover, during change of economic condition and when the market misinterprets the economic signals, foreign exchange intervention rectifies the rates so that overshooting can be avoided.
