The role which the European Central Bank needs to be allowed to play in resolving the European sovereign debt crisis needn’t amount to sustained financing of government deficits. It is perhaps better conceived of as being akin to central bank intervention in the currency markets.
When, in moments of one-sided speculation, or panic, foreign exchange markets push a currency to what by any reasonable yardstick appears to be extremely over- or under-valued levels, it’s not unusual for central banks to sell or buy that currency in sufficient volume to push it back in the opposite direction. If the central bank concerned is perceived as ‘credible’, the volume of purchases or sales required to achieve its objective will often be quite small. And if its judgement as to what constitutes ‘reasonable’ is correct, it will usually end up making a profit.
via Germany’s economic and political generals are fighting the wrong war – On Line Opinion – 24/11/2011.
When you say they buy currency – who do they buy it from?
The extract is from an article by Saul Eslake. The central bank would buy currency from the sellers who are pushing the price lower — either hedge funds/other speculators or normal trade flows.