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Abstract
The dollar intermediation channel of foreign exchange interventions (FXI), a form of the portfolio balance channel, arises from the imperfect substitutability between domestic currency and USD, the dominant global currency, along with financial frictions limiting USD liquidity access. This channel plays a key role in Banco Central do Brasil’s FXI. High-frequency data on over 8,000 FXI events (1999–2023) show that unanticipated spot sales appreciate the domestic currency, reduce covered interest parity deviations, and crowd out private intermediation—especially when intermediaries are constrained. Our results support an extended Gabaix and Maggiori (2015) model, in which constrained intermediaries amplify intervention effectiveness.