Central banks engage in foreign exchange market operations to stabilize exchange rate volatility, maintain competitiveness, or defend a currency peg. These interventions are divided into two main execution styles: Sterilized Interventions and Unsterilized Interventions.
Unsterilized Intervention Mechanics
In an unsterilized intervention, the central bank buys or sells foreign currency against its domestic currency directly on the open market, allowing the transaction to expand or contract the domestic monetary base.
Central Bank sells foreign reserves -> Ingests domestic currency tokens -> Drains interbank liquidity pools -> Short-term domestic interest rates rise

Sterilized Intervention Mechanics
To prevent an FX action from changing domestic interest rates, central banks offset the market impact using Sterilization.
[Central Bank Executes FX Sale] ---> Drains Domestic Reserve Cash
                                              |
                                              v
[Offsetting Open Market Operation] <--- Injects Equal Volume of Reserves
  - Central bank buys domestic debt bonds
  - Neutralizes net domestic interest rate shifts

By matching the foreign exchange transaction with an opposing open market operation (such as purchasing short-term domestic government bonds), the central bank leaves the total domestic monetary base unchanged while altering the currency composition of its portfolio.
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