Foreign exchange operations
The Eurosystem conducts foreign exchange operations in accordance with Articles 127 and 219 of the Treaty on the Functioning of the European Union. Foreign exchange operations include:
- foreign exchange interventions;
- operations such as the sale of interest income derived from foreign reserve assets and "commercial transactions".
Foreign exchange interventions
Unilateral or concerted action
In the absence of any formal agreements or general guidelines, the Eurosystem may decide, where necessary, to conduct foreign exchange interventions. The Eurosystem may conduct such interventions either on its own (i.e. unilaterally) or as part of a coordinated intervention involving other central banks (i.e. concerted action).
Centralised or decentralised
Interventions may be carried out either directly by the ECB (i.e. in a centralised manner) or by NCBs acting on behalf of the ECB on a "disclosed agency" basis (i.e. in a decentralised manner). Whether the intervention is conducted in a centralised or a decentralised manner is irrelevant from the point of view of the ultimate objective of the operation.
Any intervention relating to another EU currency is performed without prejudice to the ECB’s primary objective of maintaining price stability and is carried out by the Eurosystem in close cooperation with the relevant non-euro area NCB, particularly with regard to the financing of the intervention.
Exchange rate mechanism II
Foreign exchange interventions may also take place within the framework of the exchange rate mechanism II (ERM II), which entered into force at the start of Stage Three of Economic and Monetary Union. ERM II is based mainly on two legal documents: a European Council resolution of 16 June 1997; and an agreement of 1 September 1998, as amended, between the ECB and the NCBs of the non-euro area countries.
Denmark has participated in ERM II since 4 January 1999, after participating in the original ERM. Bulgaria and Croatia joined on 13 July 2020.
Euro central rates and compulsory intervention rates for currencies participating in ERM II
Role of the ECOFIN Council
Foreign exchange interventions can also be conducted in the context of institutional exchange rate relations between the euro and the currencies of countries outside the European Union (e.g. the US dollar and the Japanese yen). With regard to these currencies, Article 219 of the Treaty provides for two possible institutional arrangements:
- the ECOFIN Council can conclude formal agreements on an exchange rate system for the euro;
- the ECOFIN Council can formulate general guidelines for the Eurosystem’s exchange rate policy.
To date, neither of these two procedures has been implemented. The ECB would be involved in either case, either providing a recommendation to, or being consulted by, the ECOFIN Council. Both of these institutional procedures must, however, be without prejudice to the primary objective of maintaining price stability. The ECB’s capacity to carry out foreign exchange interventions is not restricted by its foreign reserve holdings. The ECB can also fund interventions by other means, such as foreign exchange swaps.