Treasury and Federal Reserve Foreign Exchange Operations.This report, 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, describes the foreign exchange operations of the U.S. Department of the Treasury and the Federal Reserve System for the period from April 2000 through June 2000. Laura Sarlo was primarily responsible for preparing the report. The dollar ended the second quarter little changed against the euro and 3.1 percent stronger against the yen. The dollar initially appreciated as much as 5.9 percent and 6.2 percent against the euro and yen, respectively, but slipped midquarter as expectations for the U.S. economy moderated. On a trade-weighted basis, the dollar ended the period modestly stronger, having risen 1.3 percent against the currencies of the major U.S. trading partners. 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. At the beginning of the quarter, weakness in technology shares led declines in U.S. equity markets as the Nasdaq tell 27.4 percent during the first two weeks of April. The equity markets' decline reportedly fostered some flows into 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. , and two-year yields fell 24 basis points during the same period. However, economic data released in April were widely interpreted as reflecting a pattern of strong growth along with some inflationary in·fla·tion·ar·y adj. Of, associated with, or tending to cause inflation: inflationary prices; inflationary policies. Adj. 1. pressure, as retail sales and producer and consumer price indexes for March had exceeded expectations. 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. anticipated further rate increases, raising consensus expectations for a May 16 tightening to 25 and then to 50 basis points. After its May 16 meeting, the Federal Open Market Committee (FOMC See Federal Open Market Committee. FOMC See Federal Open Market Committee (FOMC). ) announced a 50-basis-point increase in 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, raising it to 6.50 percent. Immediately after the meeting, the dollar appreciated 1.1 percent against the euro but was little changed against most other major currencies. Later in the quarter, economic data were widely interpreted as suggesting signs of moderation in the U.S. economy, and they contributed to a gradual depreciation of the dollar from its earlier highs. WEAKENING weak·en tr. & intr.v. weak·ened, weak·en·ing, weak·ens To make or become weak or weaker. weak  en·er n. OF THE EURO AND YEN AGAINST THE DOLLAR DURING THE FIRST
HALF OF THE QUARTERDuring the first half of the quarter, the dollar appreciated against most major currencies as market participants reaffirmed expectations that U.S. economic growth would continue to outpace out·pace tr.v. out·paced, out·pac·ing, out·pac·es To surpass or outdo (another), as in speed, growth, or performance. outpace Verb [-pacing, that of other major economies, including the euro area, and as U.S. asset markets continued to be perceived as generally attractive investment opportunities. Data released during this time indicated that the U.S. economy grew 5.4 percent year-on-year during the first quarter, while euro-area fourth-quarter gross domestic product rose 3.1 percent; and a June 9 release indicated that first-quarter euro-area economic growth was 3.2 percent year-on-year. In addition, surveys reflected global investors' preference for maintaining lower levels of exposure to euro-area assets or to further reduce euro holdings. Traders Traders Individuals who take positions in securities and their derivatives with the objective of making profits. Traders can make markets by trading the flow. When they do this, their objective is to earn the bid/ask spread. also suggested that euro sales related to merger and acquisition activity may have increased demand for other currencies. Additionally, euro-area political developments, including the resignation of Italian Prime Minister Massimo D'Alema and further tension between Austria and its European Union European Union (EU), name given since the ratification (Nov., 1993) of the Treaty of European Union, or Maastricht Treaty, to the European Community partners, may have dampened sentiment toward the euro. [Graph omitted] After starting the period at $0.9555, the euro fell to $0.8845 intraday Intraday Another 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. on May 4, the lowest level since its January 1999 launch. The euro then rebounded as markets responded to numerous comments by euro-area senior officials regarding the prospects for 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. . 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. in one-month euro-dollar options rose to a high of 15.1 percent on May 5. The yen weakened weak·en tr. & intr.v. weak·ened, weak·en·ing, weak·ens To make or become weak or weaker. weak en·er n. 1.9 percent against the dollar during the first
two weeks of the quarter. After Foreign Prime Minister Keizo Obuchi Keizo Obuchi (小渕恵三; Obuchi Keizō, June 25, 1937–May 14, 2000) was a Japanese politician who served in the House of Representatives for twelve terms, and ultimately as the 84th Prime Minister of Japan from July 30, 1998 to April 5, became incapacitated in·ca·pac·i·tate tr.v. in·ca·pac·i·tat·ed, in·ca·pac·i·tat·ing, in·ca·pac·i·tates 1. To deprive of strength or ability; disable. 2. To make legally ineligible; disqualify. on the first day of the period and the March Tankan report indicated an improvement in business sentiment and a smaller-than-expected decline in planned capital expenditures, Japanese monetary authorities reportedly sold yen against other currencies. The yen weakened intraday from [yen] 102.82 to [yen] 105.65 against the dollar. For the remainder of the second quarter, the yen weakened a further 1.2 percent against the dollar although it appeared little affected by the change in the cabinet and the June 25 legislative election. Declines in the Nikkei Nikkei Short for Japan's Nikkei 225 Stock Average, the leading and most-respected index of Japanese stocks. It is a price-weighted index comprised of Japan's top 225 blue-chip companies on the Tokyo Stock Exchange. and net portfolio investment outflows during the quarter may have also contributed to the yen's depreciation. MODEST DEPRECIATION OF THE DOLLAR DURING THE SECOND HALF OF THE QUARTER Beginning in late May, many market participants perceived a moderating trend in U.S. economic growth, as reflected in several economic data releases. Among these data releases were the weaker-than-expected National Association 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. and Chicago Purchasing Managers Index The PMI is a composite index that is based on five major indicators including: new orders, inventory levels, production, supplier deliveries, and the employment environment. Each indicator has a different weight and the data is adjusted for seasonal factors. surveys, the employment report and the consumer price index for May, and retail sales data. This shift in growth expectations prompted many to revise downward their forecasts for further monetary tightening. The implied yield on the July 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. declined 19 basis points from mid-May to the end of the quarter. During this period, market participants reassessed the probability of an FOMC rate increase at the June 28 meeting and began to debate the degree of additional tightening expected before the year-end. The revision in policy expectations, as well as a series of strong first-quarter earnings reports, boosted U.S. equities, with the Nasdaq gaining 12.4 percent between May 15 and the end of the quarter. [Graphs omitted] Growing expectations for moderating U.S. economic growth also contributed to the appreciation of a broad range of currencies against the dollar. On a trade-weighted basis, the dollar declined 1.9 percent in June against the currencies of the major U.S. trading partners. After June 1, the Canadian dollar Noun 1. Canadian dollar - the basic unit of money in Canada; "the Canadian dollar has the image of loon on one side of the coin" loonie dollar - the basic monetary unit in many countries; equal to 100 cents and British pound strengthened 0.7 percent and 1.5 percent, respectively, against the U.S. dollar as market participants revisited forecasts for interest rate differentials. In late May, the euro began a reversal of its April depreciation. Demand for the euro appeared to grow as short-term Short-term Any investments with a maturity of one year or less. short-term 1. Of or relating to a gain or loss on the value of an asset that has been held less than a specified period of time. investors reportedly established long euro positions and some longer-term investors began buying the euro on dips. This retracement Retracement A reversal in the movement of a stock's price, countering the prevailing trend.  Notes: An example might be market risk causing a stock's price to pull back. was also supported by the release of stronger-than-expected euro-area economic data, including euro-area industrial production and national consumer price indexes for March. Increases in M3 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. expectations that 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. ) would tighten monetary policy, although the June 8 announcement of a 50-basis-point rate increase, to 4.25 percent, exceeded market expectations. Some market participants suggested that the expectation for potential narrowing of the interest rate differential between 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. and the euro area supported the euro against the dollar. During the quarter, the spread between two-year dollar and euro swap rates Swap Rate The rate of the fixed portion of a swap as determined by its particular market. This is the rate at which the swap will occur for one of the parties entering into the agreement. narrowed 55 basis points, to 190 basis points. However, the euro did not appreciate after the June 8 ECB announcement and subsequent official comments, which were interpreted as a signal that the ECB would not undertake any additional rate increases until September Until September is a 1984 romantic drama set in France. It stars Karen Allen as an American tourist in Paris who falls in love with a married Frenchman (Thierry Lhermitte). External links . Late in the period, market participants reconsidered such expectations after the release of higher-than-expected national and euro-area producer and consumer price indexes for June, along with continued increases in oil prices. Rising shorter-dated yields did not appear to support the currency, which retreated from its quarter-high close of $0.9655 on June 16 to end the period at $0.9537. Compared with the euro, the yen appreciated more modestly against the dollar during the second half of the quarter. Market discussion of a possible end to the near-zero interest rate policy, a background factor throughout the quarter, intensified in·ten·si·fy v. in·ten·si·fied, in·ten·si·fy·ing, in·ten·si·fies v.tr. 1. To make intense or more intense: after mid-May. Comments by Bank of Japan officials contributed to some participants' estimations that the Bank of Japan's Policy Board was increasingly likely to repeal The Annulment or abrogation of a previously existing statute by the enactment of a later law that revokes the former law. The revocation of the law can either be done through an express repeal the near-zero interest rate policy, perhaps as early as July. Yields on six-month Japanese Treasury bills rose sharply, increasing from 0.06 to 0.18 percent. [Graphs omitted] Although the yen appreciated on a short-term basis on days when the possible end of the near-zero interest rate policy was a market focus, the dollar-yen exchange rate largely remained above the [yen] 105 level during the period. Widespread market concern that yen appreciation beyond [yen] 105 per dollar might prompt official action in currency markets may have supported the dollar against the yen. Ongoing concern about the Japanese corporate sector, marked by several notable bankruptcies and an absence of a pickup Pickup A gain in yield made by selling one bond and buying another. Also referred to as "yield pickup." Notes: When the present yield is relatively low compared to the longer-term yields, pickups will be done by investors trying to increase the yield and duration of their in bank lending, may also have limited the Japanese currency's appreciation. The June 25 election success of the Liberal Democratic Party led by Prime Minister Yoshiro Mori Yoshiro Mori (森 喜朗 Mori Yoshirō, born July 14, 1937) is a Japanese politician who served as the 85th and 86th Prime Minister of Japan starting at April 5, 2000 ending April 26, 2001. appeared to have little effect on the currency. ELECTION CONCERNS SWAY MEXICAN Mexican named after or originating in Mexico. Mexican axolotl see ambystomamexicanum. Mexican beaded lizard (Heloderma horridum ASSETS The dollar appreciated 5.8 percent against the Mexican peso as the peso weakened against a broad range of currencies before the July 2 presidential election. Yields on short-dated Mexican debt instruments rose as investors sought to offset the additional perceived event risk and as the Banco de Mexico tightened monetary conditions by increasing the shortage of reserves in the banking system. Longer-dated yields rose more modestly, remaining within recent ranges. The Mexican sub-index of the J.P. Morgan Emerging Market Bond Index Plus spread over U.S. Treasuries 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. rose from 354 to 381 basis points, underperforming the broader index by 50 basis points. [Graph omitted] 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 euro 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. reserve holdings totaled $15.5 billion for the Federal Reserve System and $15.5 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 their foreign currency balances in various instruments that yield market-related rates of return and have a high degree of liquidity and credit quality. To the extent practicable practicable adj. when something can be done or performed. , these investments are split evenly between the Federal Reserve System and the Exchange Stabilization Fund. A significant 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 June 30, direct holdings of foreign government securities totaled $8.2 billion, split evenly between the two authorities. Foreign government securities held under repurchase agreement totaled $13.3 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. 2000:Q2
Millions of dollars
Quarterly changes in balances,
by source
Balance
Item Mar. 31,
2000
Net
purchases Effect of
and sales(1) sales(2)
FEDERAL RESERVE SYSTEM
OPEN MARKET ACCOUNT
(SOMA)
Euro 6,597.4 0.0 0.0
Japanese yen 9,171.4 0.0 0.0
Total 15,768.7 0.0 0.0
Interest receivables (net)(5) 34.3 ... ...
Other cash flow from
investments(4) ... ... ...
Total 15,803.0 0 0
U.S. TREASURY EXCHANGE
STABILIZATION FUND (ESF)
Euro 6,594.5 0.0 0.0
Japanese yen 9,171.4 0.0 0.0
Total 15,765.9 0.0 0.0
Interest receivables(5) 59.8 ... ...
Other cash flow from
investments(4) ... ... ...
Total 15,825.7 0 0
Quarterly changes in balances,
by source
Item
Currency
Investment valuation
income adjustments(3)
FEDERAL RESERVE SYSTEM
OPEN MARKET ACCOUNT
(SOMA)
Euro 58.6 -18.5
Japanese yen 5.8 -299.3
Total 64.4 -317.7
Interest receivables (net)(5) ... ...
Other cash flow from
investments(4) ... ...
Total 64.4 -317.7
U.S. TREASURY EXCHANGE
STABILIZATION FUND (ESF)
Euro 58.6 -18.5
Japanese yen 5.8 -299.4
Total 64.4 -317.8
Interest receivables(5) ... ...
Other cash flow from
investments(4) ... ...
Total 64.4 -317.8
Quarterly
changes in
balances,
by source
Item
Interest Balance
accrual June 30,
and other(4) 2000
FEDERAL RESERVE SYSTEM
OPEN MARKET ACCOUNT
(SOMA)
Euro ... 6,637.5
Japanese yen ... 8,877.9
Total ... 15,515.4
Interest receivables (net)(5) 0.2 34.5
Other cash flow from
investments(4) 4.6 4.6
Total 4.8 15,554.5
U.S. TREASURY EXCHANGE
STABILIZATION FUND (ESF)
Euro ... 6,634.7
Japanese yen ... 8,877.8
Total ... 15,512.5
Interest receivables(5) -3.4 56.4
Other cash flow from
investments(4) 4.7 4.7
Total 1.3 15,573.6
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,
2000:Q2
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,
Mar. 31, 2000
Euro -851.1 -1,067.8
Japanese yen -2,126.9 -2,339.1
Total -2,978.0 -3,406.9
Realized profits and losses
from foreign currency sales,
Mar. 31, 2000-June 30, 2000
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,
June 30, 2000
Euro -869.6 -1,086.3
Japanese yen 1,823.3 2,044.4
Total 962.7 958.2
3. Reciprocal currency arrangements, June 30, 2000
Millions of dollars
Amount of Outstanding,
Institution facility June 30, 2000
Reciprocal currency
arrangements
Bank of Canada 2,000 0.0
Bank of Mexico 3,000 0.0
Total 5,000 0.0
Federal Reserve and U.S. Treasury
Exchange Stabilization Fund
currency arrangements
Bank of Mexico 3,000 0.0
Total 3,000 0.0
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