Treasury and Federal Reserve Foreign Exchange Operations.This report, presented by Dino Kos, Senior 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, describes the foreign exchange operations of the U.S. Department of the Treasury and the Federal Reserve System for the period from January through March 2001. Krista Schwarz was primarily responsible for preparing the report. During the first quarter of 2001, the dollar appreciated 7.3 percent against the euro and 10.3 percent against the yen in an atmosphere of increased market uncertainty about the extent and duration of global economic slowing. On a trade-weighted basis, the dollar ended the quarter 7.4 percent stronger against an index of major currencies. Despite economic data suggesting a declaration of activity 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. , the dollar's gains in value over the quarter primarily reflected global investors' preference for U.S. assets. The U.S. monetary authorities did not intervene intervene v. to obtain the court's permission to enter into a lawsuit which has already started between other parties and to file a complaint stating the basis for a claim in the existing lawsuit. in the foreign exchange markets during the quarter. FEDERAL OPEN MARKET COMMITTEE EASES U.S. MONETARY POLICY During the first quarter, the Federal Open Market Committee (FOMC See Federal Open Market Committee. FOMC See Federal Open Market Committee (FOMC). ) lowered its target federal funds rate Federal Funds Rate The interest rate at which a depository institution lends immediately available funds (balances at the Federal Reserve) to another depository institution overnight. a total of 150 basis points in three separate moves, bringing the rate from 6.5 percent to 5.0 percent. On January 3, the federal funds rate was cut 50 basis points to 6.0 percent. The FOMC cited weakening weak·en tr. & intr.v. weak·ened, weak·en·ing, weak·ens To make or become weak or weaker. weak  en·er n. sales and production, lower consumer
confidence, and tight conditions in some segments of financial markets.
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. came to expect further monetary easing in response
to additional data releases pointing to slower growth. Intraday IntradayAnother way of saying "within the day." Notes: This term is often used for the new highs and lows of a security. For example, "a new intraday high" means a security reached a new all-time high throughout the trading day, but then fell by closing. price volatility in short-dated 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. was exacerbated amid increased uncertainty as forecasts were rapidly revised. Concerns over the ramifications ramifications npl → Auswirkungen pl of the California California (kăl'ĭfôr`nyə), most populous state in the United States, located in the Far West; bordered by Oregon (N), Nevada and, across the Colorado River, Arizona (E), Mexico (S), and the Pacific Ocean (W). utility situation for other sectors of the U.S. economy added to market expectations for additional interest rate reductions. On January 31, the FOMC announced a reduction of 50 basis points in the target federal funds rate to 5.5 percent. In line with market expectations for further easing, the FOMC indicated that the balance of risks remained weighted toward economic weakness. Market participants cited anticipated easing as a factor contributing to improved investor sentiment. Over the quarter, the two-year Treasury yield declined 92 basis points while the yield on the thirty-year bond was nearly unchanged, bringing the spread between the two- and thirty-year Treasury Thirty-Year Treasury A U.S. Treasury debt obligation that has a maturity of 30 years. The 30-year Treasury is the benchmark U.S. bond and one of the world's most closely watched financial instrument. yields to 126 basis points. Rising investor caution stymied a brief rally in global equity markets as weak corporate profit forecasts and disappointing earnings prompted steep declines in major indexes. In early March, the Nasdaq index fell below the 2000 point level for the first time since December 1998, and the S&P 500 and the Nikkei indexes also reached multiyear lows. During the quarter, these three indexes fell 25.5, 12.1, and 5.7 percent respectively. The FOMC reduced the target federal funds rate an additional 50 basis points at its March 20 meeting, bringing the official rate to 5.0 percent. The central banks This is a list of central banks. Contents A B C D E F G H I J K L M N O P Q R S T U V W Y Z of Canada, the United Kingdom, Switzerland, Japan, Australia, and New Zealand New Zealand (zē`lənd), island country (2005 est. pop. 4,035,000), 104,454 sq mi (270,534 sq km), in the S Pacific Ocean, over 1,000 mi (1,600 km) SE of Australia. The capital is Wellington; the largest city and leading port is Auckland. also lowered official rates during the quarter in light of economic pressure stemming, in part, from global market developments. ECONOMIC AND POLITICAL FACTORS AFFECT SENTIMENT TOWARD JAPANESE SECURITIES On a trade-weighted basis, the yen declined 6.2 percent, with some of its sharpest losses occurring during the second half of the quarter. The yen's short-lived midquarter strength against other major currencies was widely attributed to fiscal year-end Fiscal Year-End The completion of a one-year, or 12-month, accounting period. Notes: The reason that a company's fiscal year often differs from the calendar year and does not close on Dec 31, is due to the nature of company's needs. repatriation Repatriation The process of converting a foreign currency into the currency of one's own country. Notes: If you are American, converting British Pounds back to U.S. dollars is an example of repatriation. flows and to decisions by foreign asset managers to purchase Japanese securities to bring their portfolio positions closer to neutral. In the second half of the quarter, however, market sentiment Market Sentiment The feeling or tone of a market (i.e. crowd psychology). It is shown by the activity and price movement of the securities. Notes: For example, rising prices would indicate a bullish market sentiment. toward Japan turned negative as economic and political prospects became more uncertain. Risk-reversals in dollar--yen and euro--yen options skewed skewed curve of a usually unimodal distribution with one tail drawn out more than the other and the median will lie above or below the mean. skewed Epidemiology adjective Referring to an asymmetrical distribution of a population or of data toward a premium for yen puts across maturities, and net speculative short yen positions on the International Monetary Market rose to their highest level since September 1999. Comments by Japanese officials that were interpreted as suggesting tolerance toward yen depreciation contributed to the yen's weakness at the end of the quarter. Protection against exchange rate movements became more expensive, with option-implied volatility in euro--yen and dollar--yen contracts rising 0.6 and 3.1 percent, respectively, over the quarter. In March alone, the yen depreciated Depreciated may refer to:
From the outset of the quarter, speculation over the type and timing of the Bank of Japan's action to stimulate the economy contributed to market uncertainty. In January, Bank of Japan officials discouraged dis·cour·age tr.v. dis·cour·aged, dis·cour·ag·ing, dis·cour·ag·es 1. To deprive of confidence, hope, or spirit. 2. To hamper by discouraging; deter. 3. expectations of a return to a near-zero interest rate policy. On February 9, the Bank of Japan announced changes aimed at improving money market liquidity, including a reduction of 15 basis points in the discount rate to 35 basis points, the creation of a standby standby Medtalk adjective Referring to the immediate availability of a certain specialist–anesthesiologist, surgeon, who can be deployed in a medical emergency. Cf Concurrent. Lombard-style lending facility, active outright Treasury-bill purchases for money market operations, and enhancements to bill purchase operations. On February 28, the Bank of Japan lowered the overnight call rate target and the rate on the standby facility to 15 and 25 basis points, respectively, citing slowing exports and production. On March 19, the Bank of Japan announced a shift in its operational target, effectively returning to the near-zero interest rate policy for call money. The yield implied by the June three-month euroyen 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. declined 30 basis points on the quarter, reaching 0.12 percent at the quarter-end. On February 16, the Japanese Cabinet Office downgraded its overall assessment of the economy, citing concern over a slowdown For articles with similar titles, see Slow Down (disambiguation). A slowdown is an industrial action in which employees perform their duties but seek to reduce productivity or efficiency in their performance of these duties. in external demand, and on February 22, Standard & Poor's downgraded Japan's long-term local and foreign currency sovereign credit Sovereign credit is the credit of a sovereign country backed by the financial resources of that state. Sovereign credit is the opposite of sovereign debt. Fiat money is sovereign credit and sovereign bonds are sovereign debts. When money buys bonds, sovereign credit cancels sovereign debt. ratings. Persistent rumors For other uses, see Rumor (disambiguation). Rumors is a farcical play by Neil Simon. At its start, several affluent couples gather in the posh suburban residence of a couple for a dinner party celebrating their tenth anniversary. of Prime Minister Mori's impending im·pend intr.v. im·pend·ed, im·pend·ing, im·pends 1. To be about to occur: Her retirement is impending. 2. resignation added to negative market sentiment. Through February and early March, the Topix and Nikkei stock indexes declined to two- and sixteen-year lows, respectively, lending further support to the Japanese government bond (JGB JGB Jerry Garcia Band JGB Japanese Government Bond JGB Just Got Back JGB J Geils Band JGB JG Ballard (science fiction author) ) market. Yields on two- and ten-year JGBs declined to 0.14 and 1.28 percent, respectively, their lowest levels since June 1999. During the remainder of March, ahead of the Japanese fiscal year-end, equities staged a sharp recovery from midmonth lows with the Topix and Nikkei indexes gaining 10.0 and 9.9 percent, respectively, and JGB yields rose slightly. THE EURO WEAKENS AGAINST THE DOLLAR DESPITE NARROWING INTEREST RATE DIFFERENTIALS At the outset of the quarter, the euro--dollar exchange rate was near 0.94. Despite a 68-basis-point narrowing of the spread between two-year dollar and euro swaps and aggressive monetary policy easing in the United States, the euro depreciated 6.3 percent over the quarter. On a trade-weighted basis, the euro declined 2.4 percent. Over the first half of the quarter, prospects for a near-term resumption RESUMPTION. To reassume; to promise again; as, the resumption of payment of specie by the banks is general. It also signifies to take things back; as the government has resumed the possession of all the lands which have not been paid for according to the requisitions of the law, and the of U.S. growth continued to shift to a later date, and market participants debated the possibility of a more pronounced economic slowdown. The apparent resilience resilience (r  ·zilˑ·yens),n of growth in the euro area contributed to market expectations that less monetary policy easing would be forthcoming in the euro area relative to the United States. The yield implied by the June euribor futures contract declined only 3 basis points to 4.50 percent, and the two- to ten-year German government yield curve flattened flat·ten v. flat·tened, flat·ten·ing, flat·tens v.tr. 1. To make flat or flatter. 2. To knock down; lay low: The boxer was flattened with one punch. 10 basis points to a spread of 31 basis points. Until midquarter, the euro--dollar exchange rate was little changed. In March, asset prices began to reflect expectations of some monetary easing by the 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. ) against the backdrop Backdrop may refer to:
v to hold a limb motionless in order to ground its energy; a standard isometric resistance technique, it releases tension and lengthens muscle fibers. headline inflation Headline inflation is a measure of the total inflation within an economy and is affected by areas of the market which may experience sudden inflationary spikes such as food or energy. and moderating money supply growth moving toward the ECB's reference value. In this environment, market participants began to view interest rate cuts by the ECB as imminent. Over the month of March, the euro depreciated 4.9 percent against the dollar. Many investors expressed surprise at the dollar's continued appreciation against the euro, particularly as interest rate differentials continued to narrow. The dollar's gains were supported by perceptions of the relatively greater resilience of the U.S. economy and a preference for U.S. fixed-income assets. Market reports indicated that U.S investors were scaling back foreign holdings and that foreign investors were reallocating into U.S. debt instruments. ECB data indicated that there was a 50 [European Dollars] billion net investment outflow from the euro area in January, the highest monthly outflow since January 2000. In addition, International Monetary Market data indicated a reduction in net long euro positions over the quarter. TREASURY AND FEDERAL RESERVE FOREIGN EXCHANGE RESERVES Foreign exchange reserves (also called Forex reserves) in a strict sense are only the foreign currency deposits held by central banks and monetary authorities. The U.S. monetary authorities did not undertake any intervention A procedure used in a lawsuit by which the court allows a third person who was not originally a party to the suit to become a party, by joining with either the plaintiff or the defendant. operations this quarter. At the end of the quarter, the current values of the euro and yen reserve holdings totaled $14.6 billion for the Federal Reserve System and $14.6 billion for the Treasury's 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. . 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 possible, these investments are split evenly between the Federal Reserve System and the Exchange Stabilization Fund. A significant portion of the balances is invested in 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. . Foreign currency reserves are also invested in deposits at the Bank for International Settlements and in facilities at other official institutions. As of March 31, direct holdings of foreign government securities totaled $12.9 billion, split evenly between the two authorities. Foreign government securities held under repurchase agreement totaled $2.8 billion at the end of the quarter and were also split evenly between the two authorities.
1. Foreign currency holdings of U.S. monetary authorities based on
current exchange rates, 2001:Q1
Millions of dollars
Quarterly changes in
balances, by source
Item Balance Net Effect of
Dec. 31, purchases sales(2)
2000 and
sales(1)
FEDERAL RESERVE SYSTEM
OPEN MARKET ACCOUNT
(SOMA)
Euro 7,375.9 .0 .0
Japanese yen 8,244.6 .0 .0
Total 15,620.5 .0 .0
Interest receivables (net)(5) 76.5 ... ...
Other cash flow from
investments(4) .0 ... ...
Total 15,697.0 .0 .0
U.S. TREASURY EXCHANGE
STABILIZATION FUND (ESF)
Euro 7,373.1 .0 .0
Japanese yen 8,244.7 .0 .0
Total 15,617.8 .0 .0
Interest receivables(5) 61.2 ... ...
Other cash flow from
investments(4) .0 ... ...
Total 15,679.0 .0 .0
Quarterly changes in balances,
by source
Currency
valuation Interest
Item Investment adjust- accrual
income ments(3) and other
FEDERAL RESERVE SYSTEM
OPEN MARKET ACCOUNT
(SOMA)
Euro 91.4 -471.6 ...
Japanese yen 5.9 -735.2 ...
Total 97.3 -1,206.8 ...
Interest receivables (net)(5) ... ... -.6
Other cash flow from
investments(4) ... ... .0
Total 97.3 -1,206.8 -.6
U.S. TREASURY EXCHANGE
STABILIZATION FUND (ESF)
Euro 91.8 -471.4 ...
Japanese yen 5.9 -735.3 ...
Total 97.7 -1,206.7 ...
Interest receivables(5) ... ... 11.2
Other cash flow from
investments(4) ... ... ...
Total 97.7 -1,206.7 11.2
Item Balance
Mar. 31
2000
FEDERAL RESERVE SYSTEM
OPEN MARKET ACCOUNT
(SOMA)
Euro 6,995.7
Japanese yen 7,515.3
Total 14,511.0
Interest receivables (net)(5) 75.9
Other cash flow from
investments(4) .0
Total 14,586.9
U.S. TREASURY EXCHANGE
STABILIZATION FUND (ESF)
Euro 6,993.5
Japanese yen 7,515.3
Total 14,508.8
Interest receivables(5) 72.4
Other cash flow from
investments(4) .0
Total 14,581.2
NOTE. Figures 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 exchange rate and the
most recent revaluation exchange rate. Realized profits and losses on
sales of foreign currencies, computed as the difference between the
historical 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.) Values are cash flow differences from payments and collection of
funds between quarters.
(5.) Interest receivables for the ESF 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.
... 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,
2001:Q1
Millions of dollars
Federal U.S. Treasury
Reserve Exchange
Period and item System Open Stabilization
Market Account Fund
Valuation profits and losses on
outstanding assets and liabilities,
Dec. 31, 2000
Euro -936.6 -1153.3
Japanese yen 1,194.7 1,406.9
Total 258.1 253.6
Realized profits and losses
from foreign currency sales,
Dec. 31, 2000-Mar. 31, 2001
Euro .0 .0
Japanese yen .0 .0
Total .0 .0
Valuation profits and losses on
outstanding assets and liabilities,
Mar. 31. 2001
Euro -1,408.1 -1,624.6
Japanese yen 459.5 671.6
Total -948.6 -953.0
3. Reciprocal currency arrangements, March 31, 2001
Millions of dollars
Institution Amount of Outstanding,
facility Mar. 31, 2001
Reciprocal currency
arrangements
Bank of Canada 2,000 0.00
Bank of Mexico 3,000 0.00
Total 5,000 0.00
Federal Reserve and U.S. Treasury
Exchange Stabilization Fund
currency arrangements
Bank of Mexico 3,000 0.00
Total 3,000 0.00
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