Intervention tactics in the foreign exchange markets have evolved through different phases in recent decades. At times, many central banks in the G10 sphere have intervened, particularly the Bank of Japan, although more recently the trend had been moving towards a hands-off approach.

In the aftermath of the Asia crisis, a similar trend was seen among emerging markets' central banks although the dollar weakness of 2003 saw a build-up in reserves as some countries wanted to stop the appreciation of their own currencies. Nevertheless, the trend to more freely floating currencies with less intervention was becoming more and more common, with foreign exchange regulations broadly becoming more relaxed.

Intervention was seen as having little prolonged impact, and could detract from other policy initiatives, possibly undermining monetary policy. However, the commodity boom and resulting emerging markets currency appreciation seen in recent years made some central banks become uncomfortable with their currency's strength. We began to see US dollar buying (in various guises) from the likes of Brazil, Chile, Colombia, Israel, Russia, China and others. As a result, foreign exchange reserves in aggregate rose substantially.

However, as a result of the crisis, the turnaround has been dramatic. The global financial turmoil and subsequent US dollar strength has placed emerging market currencies under pressure. Reluctantly, many central banks have defended their currencies by selling US dollars.

However, not all are doing so. Many countries, concerned that the global downturn will worsen, are seeing currency weakness as a potential policy tool to support their manufacturing and export industries. This is not only true in the emerging markets, but in the G10 as well: the UK, Switzerland, Sweden and Canada have all extolled the virtues of a weaker currency.

Oddly, the Japanese have done little to actively weaken their currency. Looking across the emerging market spectrum, we are seeing increasingly divergent intervention policies.

Central banks across the Latin America region are intervening in the foreign exchange markets regularly. Whereas a year ago most were resisting upward pressure on their own currencies, many are now doing the opposite, selling US dollars and thereby capping the US dollar strength.

Reserves in the region have therefore begun to fall, after rising consistently for the past few years: from the beginning of 2007 to mid-2008, they practically doubled. Many central banks are ostensibly looking to reduce volatility and bring a sense of calm back to their markets, though in some cases, the US dollar strength seen in recent months means that to do so means almost exclusively selling US dollars and buying their local currency.

In contrast to Latin America, where the primary intervention activity in recent months has involved US dollar sales, in Asia we are seeing increasing tolerance - or in some cases active encouragement - of local currency depreciation.

Compared to the fourth quarter of 2008, both foreign exchange volatility and intervention activities have fallen this year, but many Asian central banks are still quite active in the market.

The reason Asian policy-makers are more tolerant of local currency weakness, we believe, is down to two macro trends. The first is the surprisingly severe slump in exports. Although the nature of the external demand downturn means that lower prices will do little to boost export volumes, a weaker currency does go some way to marginally cushion exporters by allowing better margins.

The second is inflation rates, which have been falling more swiftly than expected. Just as disinflation is allowing policymakers to comfortably slash rates, so too does it make policymakers more comfort-able with currency deprecia-tion. This is especially true as falling imported commodity prices have driven the bulk of disinflation.

Moreover, as policy rates approach zero and as central bankers look to expand their policy toolbox, the currency will increasingly be seen as a sensible policy tool to aid easing elsewhere.

Emerging European, Middle Eastern and African markets have seen relatively less official intervention, although in certain cases, notably Russia, there has still been substantial intervention from the central bank and making changes to how its currency regime operates. Meanwhile, other central banks, particularly those of Turkey and South Africa, stayed out of the market.

This report was compiled by the Marketing Department of HSBC Bank Malta plc on the basis of economic research and financial information produced by HSBC International Bank.