Question

Why do governments and central banks intervene in the foreign exchange markets? If markets are efficient, why not let them determine the value of a currency?

Answer 1

Government and Central banks are often intervening into the foreign currency market because they want to protect the interest of their domestic currency shareholders as well as they also want to freeze their devaluation of their currency.

When Central banks fear that their domestic currency will fall against another currency they will often be selling those foreign currency into the domestic markets or they would be buying into domestic currency in order to to make it more valuable in comparison to the foreign currency.

These are operational intervention or this could even be jawboning in nature like Central Government can be more verbal and they can assure the markets to control the devaluation in currency and comfort them of taking some aggressive steps in order to restructure the currency markets.

Markets are never efficient because there are a lot of manipulation practices as well as there are a lot of insider trading informations and active investors can always beat the passive investment if there is appropriate management, so market efficiency is just theoretical concept.