Treasury and Federal Reserve Foreign Exchange Operations.This quarterly report describes US. Treasury and System foreign exchange operations for the period from July through September 1999. It was presented by Peter R. Fisher, Executive Vice President, Federal Reserve Bank of New York The Bank of New York, abbrieviated to BNY, was a global financial services company that existed until its merger with the Mellon Financial Corporation on July 2, 2007.[1] The bank now continues under the new name of The Bank of New York Mellon Corporation. , and Manager, System Open Market Account. Deborah L. Leonard was primarily responsible for preparation of the report. During the third quarter of 1999, the dollar depreciated Depreciated may refer to:
adj. Of considerable size; fairly large. siz  a·ble·ness n. portfolio flows as international investors
reassessed views of expected risk-adjusted returns Risk-Adjusted ReturnA measure of how much risk a fund or portfolio takes on to earn its returns, usually expressed as a number or a rating. Notes: This is often represented by the Sharpe Ratio. The more return per unit of risk, the better. in global capital markets. The U.S. monetary authorities did not intervene in the foreign exchange markets during the quarter. IMPROVEMENT IN THE OUTLOOK FOR GLOBAL ECONOMIC GROWTH The U.S. economy continued to show buoyant Buoyant The term used to describe a commodities market where the prices generally rise with ease when there are considerable signals of strength. Notes: These types of markets can be very volatile as the prices are rapid to rise and fall with investor sentiment. activity in the third quarter, although its pace of growth appeared to slow. Expectations for aggressive monetary policy tightening in the united States United States, officially United States of America, republic (2005 est. pop. 295,734,000), 3,539,227 sq mi (9,166,598 sq km), North America. The United States is the world's third largest country in population and the fourth largest country in area. waned in the initial weeks of the quarter after the Federal Open Market Committee (FOMC See Federal Open Market Committee. FOMC See Federal Open Market Committee (FOMC). ) raised the federal funds Federal Funds Funds deposited to regional Federal Reserve Banks by commercial banks, including funds in excess of reserve requirements. Notes: These non-interest bearing deposits are lent out at the Fed funds rate to other banks unable to meet overnight reserve target rate from 4.75 to 5.00 percent and adopted a neutral policy stance on June 30. Many market participants The term market participant is used in United States constitutional law to describe a U.S. State which is acting as a producer or supplier of a marketable good or service. When a state is acting in such a role, it may permissibly discriminate against non-residents. posited that benign price data and forecasts of slower growth made further near-term policy changes less likely. Nevertheless,' yields on U.S. Treasury securities U.S. Treasury securities Interest-bearing obligations if the U.S. government issued by the U.S. Department of the Treasury as a means of borrowing money to meet government expenditures not covered by tax revenues. rose to fifteen-month highs after Chairman Greenspan warned in his July 22 Humphrey-Hawkins testimony that the FOMC would act "promptly and forcefully" should inflationary pressures emerge. Rising commodity prices, particularly for oil, also raised some concerns about the outlook for inflation. The subsequent release of lower-than-expected second-quarter GDP GDP (guanosine diphosphate): see guanine. growth of 2.3 percent on July 29 and subdued sub·due tr.v. sub·dued, sub·du·ing, sub·dues 1. To conquer and subjugate; vanquish. See Synonyms at defeat. 2. To quiet or bring under control by physical force or persuasion; make tractable. 3. consumer and producer price reports shortly after that date supported the view that further tightening might not be imminent, even though labor markets labor market A place where labor is exchanged for wages; an LM is defined by geography, education and technical expertise, occupation, licensure or certification requirements, and job experience remained taut taut adj. taut·er, taut·est 1. Pulled or drawn tight; not slack. See Synonyms at tight. 2. Strained; tense: nerves taut with anxiety. 3. a. and the manufacturing sector remained strong. The FOMC raised the federal funds target rate 25 basis points, to 5.25 percent on August 24, with an accompanying statement that the two recent rate increases should "markedly diminish the risk of rising inflation going forward." A weaker-than-expected report on nonfarm payrolls Nonfarm payrolls is an economic employment report released monthly. It is a compiled name for goods-producing, construction and manufacturing companies. The data is released at 1:30pm BST on the first Friday of every month, or according to the U.S. on September 3 and moderate consumer price data on September 15 bolstered this sentiment. Signs of ongoing economic stabilization in Japan were reflected in data releases throughout the third quarter. Strong industrial production figures released on July 29 showing a 3.0 percent rise in output for June were followed on August 13 by a slight upward revision to the already surprisingly strong reading for first-quarter GDP growth, from 1.9 percent to 2.0 percent over the fourth quarter of 1998. Second-quarter GDP data released on September 9, also surprisingly strong, showed growth of 0.2 percent compared with market expectations for a contraction of 0.3 percent. Several market participants cited gains in Japanese equities as a reflection of growing confidence in Japan's recovery, as the small-capitalization JASDAQ Jasdaq See: Japanese Association of Securities Dealers Automated Quotation System index soared 26 percent during the quarter; however, the Nikkei index traded in a narrower range amid the uncertain effect of a stronger yen on shares of large-capitalization exporters. Improving economic indicators Economic indicators The key statistics of the economy that reveal the direction the economy is heading in; for example, the unemployment rate and the inflation rate. across Europe provided mounting evidence of a cyclical cyclical Of or relating to a variable, such as housing starts, car sales, or the price of a certain stock, that is subject to regular or irregular up-and-down movements. recovery in the euro area. Throughout the quarter, many private and multilateral institutions revised upward their forecasts of economic growth. Data releases early in the quarter were inconclusive INCONCLUSIVE. What does not put an end to a thing. Inconclusive presumptions are those which may be overcome by opposing proof; for example, the law presumes that he who possesses personal property is the owner of it, but evidence is allowed to contradict this presumption, and show who is , but a marked improvement in surveys of German and French business sentiment and manufacturing orders later in the period led to growing expectations for an upswing Upswing An upward turn in a security's price after a period of falling prices. in industrial activity across Europe. On July 15, European Central Bank European Central Bank (ECB) Bank created to monitor the monetary policy of the countries that have converted to the Euro from their local currencies. The original 11 countries are: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, (ECB See electronic code book. ) President Duisenberg suggested that a "[tightening] bias was gradually creeping" into the ECB's policy considerations. Toward the end of the quarter, expectations for a near-term tightening solidified so·lid·i·fy v. so·lid·i·fied, so·lid·i·fy·ing, so·lid·i·fies v.tr. 1. To make solid, compact, or hard. 2. To make strong or united. v.intr. as producer prices rose across Europe, surveys of purchasing managers A Purchasing Manager is an employee within a company, business or other organization who is responsible at some level for buying or approving the acquisition of goods and services needed by the company. indicated higher prices paid for inputs, and senior ECB officials highlighted the risks of inflation in their public comments. EXPECTATIONS FOR MONETARY POLICY ACTIONS SHIFT Fundamental economic developments and comments from public officials in the United States, Japan, and Europe contributed to changing expectations for monetary policy actions throughout the quarter. In the United States, the FOMC's choice of a symmetric No difference in opposing modes. It typically refers to speed. For example, in symmetric operations, it takes the same time to compress and encrypt data as it does to decompress and decrypt it. Contrast with asymmetric. (mathematics) symmetric - 1. policy outlook after monetary policy tightenings on June 30 and again on August 24 encouraged market participants to carefully evaluate new information for potential signs of near-term policy direction. Early in the quarter, the implied yield on the December federal funds futures contract Futures Contract An exchange traded agreement to buy or sell a particular type and grade of commodity for delivery at an agreed upon place and time in the future. Futures contracts are transferable between parties. fell 16 basis points, as market participants responded to the neutral bias, and then rose 28 basis points after Chairman Greenspan's Humphrey-Hawkins testimony. However, the implied yield then fell 14 basis points from its period high of 5.49 percent, to end the quarter relatively unchanged. In Europe, forecasts of stronger growth, rising inflation, and comments from ECB officials contributed to the view that the balance of risks implied a tightening of European monetary policy sooner rather than later. In Japan, the yield on Japan's ten-year benchmark government bond rose as high as 2.00 percent. Stronger economic data and Bank of Japan Governor Hayami's June 30 testimony that Japan's zero interest rate policy was "extraordinary," led some market participants to expect that the Bank of Japan might abandon its loose monetary policy sooner than previously expected. Ongoing discussion about additional fiscal stimulus measures further weighed on bond prices. However, the implied yield on the December euroyen futures contract fell steadily, from 0.54 percent to 0.18 percent, amid subsequent reassurances that the current zero interest rate policy would remain intact until signs of deflation deflation: see inflation. deflation Contraction in the volume of available money or credit that results in a general decline in prices. A less extreme condition is known as disinflation. had dissipated dis·si·pat·ed adj. 1. Intemperate in the pursuit of pleasure; dissolute. 2. Wasted or squandered. 3. Irreversibly lost. Used of energy. . In addition, the yen's persistent strength and domestic and international political pressures directed attention to the possibility that the Bank of Japan would provide further monetary stimulus to the economy. Throughout September, market discussion focused on calls by some observers in Japan and in the markets for the Bank of Japan to adopt "quantitative easing Quantitative easing was a tool of monetary policy that the Bank of Japan used to fight deflation in the early 2000s. The BOJ had been maintaining short-term interest rates at close to their minimum attainable zero values since 1999. " measures, including unsterilized intervention Unsterilized intervention Foreign exchange market intervention in which the monetary authorities have not insulated their domestic money supplies from the foreign exchange transactions. , to invigorate in·vig·or·ate tr.v. in·vig·or·at·ed, in·vig·or·at·ing, in·vig·or·ates To impart vigor, strength, or vitality to; animate: "A few whiffs of the raw, strong scent of phlox invigorated her" Japan's economy. At its September 21 meeting, the decision by the Bank of Japan's Policy Board to maintain its zero interest rate policy was accompanied by a statement emphasizing the central bank's belief that it was already supplying ample liquidity to the money market. The Bank of Japan further stated that the "foreign exchange rate in itself is not a direct objective of monetary policy," but also that the Bank "considers it is important to carefully monitor the development of the foreign exchange rate from the viewpoint of how it affects the economy and prices." Market participants perceived a greater willingness by the Bank of Japan to consider additional stimulus measures after the September 25 meeting of the Group of Seven finance ministers and central bank heads, who expressed shared concern with Japan about the potential effect of the yen's appreciation. After the meeting, Bank of Japan Governor Hayami issued a statement that the Bank shared the Japanese government's concern about yen appreciation; that it was prepared to respond to developments in the economy as well as in the financial markets, including the foreign exchange market; and that it was exploring ways to ensure that liquidity further permeated the money markets in Japan. DOMINATION OF CURRENCY MOVEMENTS BY PORTFOLIO FLOWS A reassessment Reassessment The process of re-determining the value of property or land for tax purposes. Notes: Property is usually reassessed on an annual basis. You may request a "reassessment" if you disagree with your assessment. of economic fundamentals and changing policy expectations among the Group of Three was also reflected in portfolio flows during the quarter, particularly with respect to the yen. The yen steadily appreciated to a three-and-a-half-year low of 103.72 [Yen] against the dollar and an all-time low of 108.70 [Yen] against the euro on September 23 and 24 respectively. Shifts in portfolio flows in favor of Japanese assets took place as Japanese and foreign investors re-evaluated their perceived risk-adjusted returns on capital in global markets. For Japanese investors, the yen's rise substantially reduced the value of unhedged foreign assets. In yen terms, the price return on an index of euro-denominated sovereign bonds A sovereign bond is a bond issued by a national government. Bonds issued by national governments in the country's own currency are also referred as government bonds. , which already had fallen 11 percent from the beginning of 1999 to July 1, fell as much as 24 percent toward the end of September. Year-to-date, yen-adjusted price returns on an index of U.S. Treasury U.S. Treasury Created in 1798, the United States Department of the Treasury is the government (Cabinet) department responsible for issuing all Treasury bonds, notes and bills. Some of the government branches operating under the U.S. Treasury umbrella include the IRS, U.S. notes and bonds had gained 3 percent as the third quarter began but fell 12 percent by September 30. Although the U.S. S&P 500 equity index declined 6.6 percent in the third quarter, it fell approximately 18 percent in yen terms. Such losses reportedly encouraged Japanese investors to hedge or liquidate To pay and settle the amount of a debt; to convert assets to cash; to aggregate the assets of an insolvent enterprise and calculate its liabilities in order to settle with the debtors and the creditors and apportion the remaining assets, if any, among the stockholders or owners of the overseas positions ahead of Japan's September 30 fiscal half-year-end book closings, thereby accelerating the yen's rise. Improved Japanese growth prospects also encouraged international investors to increase the share of Japanese equities in their portfolios. Such portfolio shifts were further encouraged by concerns about growing external imbalances, persistent questions about valuation levels for U.S. stocks, and prospects for higher interest rates in the United States and Europe. On several occasions during the quarter, officials from the Japanese Ministry of Finance publicly stated that the Bank of Japan had intervened in the foreign exchange markets, buying dollars and selling yen. Although Japanese officials repeatedly expressed concern about a "premature" strengthening of the yen before economic recovery had been firmly established, some market participants noted that the interventions appeared to attempt to smooth the rate of the yen's appreciation rather than to roll it back. Nevertheless, uncertainty regarding Japan's foreign exchange policy objectives contributed to a sharp rise in market volatility. In the options market, one-month implied volatility Implied volatility The expected volatility in a stock's return derived from its option price, maturity date, exercise price, and riskless rate of return, using an option pricing model such as Black-Scholes. for the dollar-yen exchange rate soared from around 10 percent to as high as 22 percent toward the end of the quarter, reflecting greater uncertainty among market participants about the yen's trading range Trading Range The spread between the high and low prices traded during a period of time. Notes: When a stock breaks through or falls below its trading range after several days of trading in a range, it usually means there is momentum (positive or negative) building. . Movements in the euro's value against the yen were also largely influenced by portfolio flows, as Japanese investors hedged or reduced their exposure to euro-denominated assets. In contrast to the dollar's steady decline against the yen, movements in the dollar-euro exchange rate reflected changing expectations regarding relative economic growth and interest rate prospects in the United States and Europe. After trading to a low of $1.0136 early in the quarter, the euro rebounded sharply in July in response to the rising momentum of European growth, President Duisenberg's intimation that a tightening bias was "creeping" into ECB policy considerations, and increased expectations of higher interest rates in Europe. The euro reversed some of its gains after benign U.S. price data supported a short-lived rally in U.S. asset markets in August but subsequently rose in response to European price and manufacturing data that was interpreted as increasing the possibility of near-term interest rate hikes. The euro again pared its gains at the beginning of September, when U.S. producer price and employment data made additional interest rate increases in the United States appear less imminent, and after Germany's ruling Social Democratic Party suffered widespread losses in regional elections. However, the European currency again rose at the end of the quarter, after strong U.S. retail sales and trade data showing a rising deficit weighed heavily on U.S. equity markets. More generally, the euro's appreciation against the dollar this quarter reflected the broader trend of narrowing U.S. and European yield spreads. Euro-area sovereign bonds underperformed U.S. Treasury securities, with the spread between ten-year U.S. and German government bond yields narrowing 46. basis points over the quarter and reaching a low of 82 basis points on September 23, its lowest level since January. TREASURY AND FEDERAL RESERVE FOREIGN EXCHANGE OPERATIONS The U.S. monetary authorities did not undertake any intervention operations during the quarter. At the end of the quarter, the current values of reserve holdings of euros and Japanese yen “Yen” redirects here. For the other use, see Yen (disambiguation). “JPY” redirects here. For the Australian singer with the same moniker, see John Paul Young. totaled $16.1 billion for the Federal Reserve System and $16.1 billion for the Exchange Stabilization Fund The Exchange Stabilization Fund (ESF) is a branch of the United States Treasury Department which manages a portfolio of domestic and foreign currencies for the purpose of foreign exchange intervention. .(1) The U.S. monetary authorities invest all of their foreign currency balances in a variety of instruments that yield market-related rates of return and have a high degree of liquidity and credit quality. To the greatest extent practicable, these investments are split evenly between the Federal Reserve System and the Exchange Stabilization Fund. A portion of the balances is invested in German and Japanese government securities held directly or under repurchase agreement Repurchase agreement An agreement with a commitment by the seller (dealer) to buy a security back from the purchaser (customer) at a specified price at a designated future date. . Government securities held under repurchase agreement are arranged either through transactions executed directly in the market or through agreements with official institutions. Foreign currency reserves are also invested in deposits at the Bank for International Settlements and in facilities at other official institutions. As of September 30, direct holdings of foreign government securities totaled $9.1 billion--split evenly between the two authorities. Foreign government securities held under repurchase agreement totaled $13.2 billion at the end of the quarter and were also split evenly between the two authorities. [Charts 1-10 ILLUSTRATION OMITTED] (1.) Amounts are based on carrying value Carrying Value Also know as "book value," it is a company's total assets minus intangible assets and liabilities, such as debt. Notes: This is different than market value, as it can be higher or lower depending on the circumstances. and September 30 exchange rates. 1. Foreign currency holdings of U.S. monetary authorities based on current exchange rates, 1999:Q3
Millions of dollars
Quarterly changes in
balances, by source
Balance. Net
June purchases
Item 30, 1999 and Effect of
sales(1) sales(2)
FEDERAL RESERVE SYSTEM
OPEN MARKET ACCOUNT
(SOMA)
EMU euro 6.943.7 0.0 0.0
Japanese yen 7.786.9 0.0 0.0
Total 14,730.6 0.0 0.0
Interest receivables(4) 68.4 ... ...
Other cash flow from ... ... ...
investments(5)
Total 14,799.0 0.0 0.0
U.S. TREASURY EXCHANGE
STABILIZATION FUND (ESF)
EMU euro 6,944.6 0.0 0.0
Japanese yen 7,787.0 0.0 0.0
Total 14,731.6 0.0 0.0
Interest receivables(4) 45.5 ... ...
Other cash flow from ... ... ...
investments(5)
Total 14,777.1 0.0 0.0
Quarterly changes in balances, by source
Interest
Currency accrual
Item Investment valuation (net)
income adjustments(3) and other
FEDERAL RESERVE SYSTEM
OPEN MARKET ACCOUNT
(SOMA)
EMU euro 53.0 225.1 0.0
Japanese yen 2.0 1,043.0 0.0
Total 55.0 1,268.1 0.0
Interest receivables(4) ... ... -17.3
Other cash flow from ... ... 13.4
investments(5)
Total 55.0 1,268.1 -3.9
U.S. TREASURY EXCHANGE
STABILIZATION FUND (ESF)
EMU euro 49.3 225.2 0.0
Japanese yen 2.0 1,042.8 0.0
Total 51.3 1,268.0 0.0
Interest receivables(4) ... ... 20.7
Other cash flow from ... ... 13.3
investments(5)
Total 51.3 1,268.0 34.0
Balance.
Item Sept. 30, 1999
FEDERAL RESERVE SYSTEM
OPEN MARKET ACCOUNT
(SOMA)
EMU euro 7,221.8
Japanese yen 8.831.9
Total 16,053.7
Interest receivables(4) 51.1
Other cash flow from 13.4
investments(5)
Total 16,118.2
U.S. TREASURY EXCHANGE
STABILIZATION FUND (ESF)
EMU euro 7,219.1
Japanese yen 8,831.8
Total 16,050.9
Interest receivables(4) 66.2
Other cash flow from 13.3
investments(5)
Total 16,130.4
NOTE. In this and subsequent tables, components may not sum to totals because of rounding, (1.) Purchases and sales for the purpose of this table include foreign currency sales and purchases related to official activity, swap drawings and repayments, and warehousing, (2.) This figure is calculated using marked-to-market exchange rates: it represents the difference between the sale the exchange rate and the most recent revaluation Revaluation A calculated adjustment to a country's official exchange rate relative to a chosen baseline. The baseline can be anything from wage rates to the price of gold to a foreign currency. In a fixed exchange rate regime, only a decision by a country's government (i.e. exchange rate. Realized profits Realized profit (or loss) A capital gain or loss on securities held in a portfolio that has become actual by the sale or other type of surrender of one or many securities. and losses on sales of foreign currencies, computed ax the difference between the historic cost-of-acquisition exchange rate and the sale exchange rate, are reflected in table 2 (3.) Foreign currency balances are marked-to-market monthly at month-end exchange rates. (4.) Interest receivables for the ESF (1) (Extended SuperFrame) An enhanced T1 format that allows a line to be monitored during normal operation. It uses 24 frames grouped together (instead of the 12-frame D4 superframe) and provides room for CRC bits and other diagnostic commands. are revalued at month-end exchange rates. Interest receivables for the Federal Reserve System are carried at average cost of acquisition and are not marked to market until interest is paid. Interest receivables for the Federal Reserve System are net of unearned interest Unearned interest Interest that has been received on a loan, but that cannot be treated as a part of earnings yet, because the principal of the loan has not been outstanding long enough. collected. (5.) Values for cash flow differences from payment and collection of funds between quarters. ... Not applicable 2. Net profits or losses (-) on U.S. Treasury and Federal Reserve foreign exchange operations, based on historical cost-of-acquisition exchange rates, 1999:Q3
Millions of dollars
Federal
Reserve U.S. Treasury
System Open Exchange
Period and item Market Stabilization
Account Fund
Valuation profits and losses on
outstanding assets and liabilities,
June 30, 1999
EMU euro -345.0 -562.0
Japanese yen 746.3 958.5
Total 401.3 396.5
Realized profits and losses
from foreign currency sales,
June 30, 1999-Sept. 30, 1999
EMU euro 0.0 0.0
Japanese yen 0.0 0.0
Total 0.0 0.0
Valuation profits and losses on
outstanding assets and liabilities,
Sept. 30, 1999
EMU euro -119.9 -336.9
Japanese yen 1,775.8 1,988.0
Total 1,655.9 1,651.1
3. Currency arrangements. September 30, 1999
Millions of dollars
Institution Amount of Outstanding,
facility Sept. 30, 1999
Federal Reserve
reciprocal currency
arrangements
Bank of Canada 2,000 0.0
Bank of Mexico 3,000 0.0
Total 5,000 0.0
U.S. Treasury
Exchange Stabilization Fund
currency arrangements
Bank of Mexico 3,000 0.0
Total 3,000 0.0
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