What is direct intervention in currency markets?

Direct intervention in currency markets refers to the practice of buying and selling foreign currency reserves by a country's central bank to influence the value of its own currency. This strategy is used when a government or central bank seeks to stabilize or control fluctuations in its currency's value by actively participating in the foreign exchange market. By engaging in direct intervention, a central bank can affect supply and demand dynamics, thereby guiding the exchange rate in a desired direction.

For instance, if a central bank believes that its currency is overvalued and wants to lower its value, it may sell its currency while purchasing foreign currency. Conversely, if it aims to increase the value of its currency, it might buy its own currency using foreign reserves. This method directly impacts the market and can help attain targeted exchange rate levels that align with economic objectives.

The other options relate to economic influence through different mechanisms, such as adjusting fiscal policies or manipulating interest rates, but they do not involve straightforward buying and selling in the currency exchange market, which defines direct intervention.