Treasury and Federal Reserve Foreign Exchange Operations.During the first quarter of 1999, the dollar appreciated 8.4 percent against the euro and 5.3 percent against the yen. The dollar's value was largely influenced by changes in market expectations for economic growth 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. , Europe, and Japan. Against the euro, the dollar strengthened as the differential between U.S. and European interest rates moved increasingly in favor of the dollar. Against the yen, the dollar fell to a two-and-a-half-year low, then rebounded after the Bank of Japan reportedly intervened to counter yen appreciation and subsequently guided overnight interest rates to near zero. The U.S. monetary authorities did not intervene in the foreign exchange markets during the quarter. PARTIAL RECOVERY OF RISK APPETITE At the outset of the new year, trading in the major currencies was thin. Reduced activity was attributed in part to a decline in speculative trading and a tentative return of asset managers to higher-yielding markets. Euro trading volumes Trading volume The number of shares transacted every day. As there is a seller for every buyer, one can think of the trading volume as half of the number of shares transacted. That is, if A sells 100 shares to B, the volume is 100 shares. remained below historical German mark trading volumes over comparable time frames; uncertainty regarding the behavior of the newly established 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. ) contributed to the low volume. Although new investment supported selected emerging markets and high-yield assets, lingering concern about overall risk exposure resulted in heightened differentiation and relatively high risk premiums. The devaluation devaluation, decreasing the value of one nation's currency relative to gold or the currencies of other nations. It is usually undertaken as a means of correcting a deficit in the balance of payments. of the Brazilian real The real (IPA: [xe'aw] or [ʁe'aɫ], symbol: R$, ISO 4217 code: BRL, plural: reais) is the currency of Brazil. It is also the name of the earliest Brazilian currency (see from the Colonial period to 1942. on January 13 evoked some apprehension, but reaction was fairly muted as a result of the position unwinding that had already occurred after the Russian currency devaluation Currency devaluation A deliberate downward adjustment in the official exchange rates established, or pegged, by a government against a specified standard, such as another currency or gold. and debt moratorium A debt moratorium is a delay in the payment of debts or obligations. The term is generally used to refer to acts by national governments. A moratory law is usually passed in some special period of political or commercial stress; for instance, on several occasions during the in August 1998. Reflective of 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. , emerging-market sovereign yield spreads 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 sharply after the Brazilian currency devaluation but soon returned to early-January levels. Nonetheless, spreads generally remained well above pre-Russian devaluation levels, and many emerging-market mutual funds continued to experience net outflows. U.S. corporate high-yield spreads over U.S. Treasuries narrowed, reflecting the desire of investors to increase risk exposure on a selective basis. RISE OF THE DOLLAR AGAINST THE EURO The dollar depreciated Depreciated may refer to:
adj. 1. Intemperate in the pursuit of pleasure; dissolute. 2. Wasted or squandered. 3. Irreversibly lost. Used of energy. and 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. focused on the apparent divergence in the outlooks for growth between the U.S. and European economies. Over the quarter, the implied yield spread between September three-month Eurodollar and Euribor (European interbank in·ter·bank adj. Relating to, involving, or connecting two or more banks: interbank borrowing; an interbank network of automated teller machines. offered rate for euro deposits) futures contracts 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. widened 49 basis points, to 232 basis points, supported by market expectations of divergent monetary policy responses to growth trends by the Federal Open Market Committee (FOMC See Federal Open Market Committee. FOMC See Federal Open Market Committee (FOMC). ) and the ECB Governing Council. Similarly, the spread between yields of ten-year U.S. Treasuries and German bonds widened 62 basis points from the start of the quarter, to a decade high of 146 basis points on February 25. The dollar was supported throughout most of the quarter by expectations of a shift in U.S. monetary policy toward a tightening bias. The change in expectations was prompted by stronger-than-expected economic growth, employment, consumer spending Consumer demand or consumption is also known as personal consumption expenditure. It is the largest part of aggregate demand or effective demand at the macroeconomic level. , and hourly earnings data, which raised concern that the U.S. economy might begin to show signs of inflationary pressures. Speculation of a near-term change in U.S. monetary policy mounted after the HumphreyHawkins testimony on February 23, during which Chairman Greenspan stated that the FOMC would evaluate "whether the full extent of the policy easings undertaken last fall to address the seizing-up of financial markets remains appropriate as those disturbances abate abate v. to do away with a problem, such as a public or private nuisance or some structure built contrary to public policy. This can include dikes which illegally direct water onto a neighbors property, high volume noise from a rock band or a factory, an improvement ." The implied yield of 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 futures contract for September rose 44 basis points from the start of the quarter, to a high of 5.09 percent on March 1. U.S. Treasury yields rose in response to rising short-term yields, heavy corporate bond issuance, and reported sales by Japanese financial institutions before their 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. on March 31. Meanwhile, the euro experienced downward pressure from increasing expectations of a euro area rate cut after several economic data releases indicated further downside risk Downside Risk An estimation of a security's potential to suffer a decline in price if the market conditions turn bad. Notes: You can think of this as an estimate of the amount that you could lose on a stock or other investment. to European growth and by official commentary that was interpreted as suggesting approval of current exchange rate levels. The resignation of German Finance Minister LaFontaine on March 11, that was perceived as having reduced political pressure on the ECB, also contributed to speculation that the ECB Governing Council would cut rates sooner than previously expected. Implied yield of the September three-month Euribor futures contract fell 27 basis points, to 2.79 percent by quarter-end. Both the eurodollar exchange rate and spreads between U.S. and European yields stabilized toward the end of the quarter, as expectations for a near-term shift in U.S. monetary policy receded after the release of U.S. wage data suggesting that inflationary pressures remained quiescent quiescent at rest; latent; the G0 stage of the cell cycle. . On a trade-weighted basis, the euro depreciated 5.3 'percent over the quarter, approaching the lower end of its reconstructed tenyear 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. . STRENGTHENING OF THE DOLLAR AGAINST THE YEN The dollar began the new year at [Yen] 112.80, but soon depreciated to a multiyear low of [Yen] 108.22 on January 11, as Japanese investors reallocated funds from U.S. assets to European and Japanese assets. International investors also expressed interest in Japanese assets, as evidenced by strong foreign demand for Japanese bonds auctioned on January 7. In addition, the perception that Japanese monetary conditions tightened as funding pressures abated Abated, an ancient technical term applied in masonry and metal work to those portions which are sunk beneath the surface, as in inscriptions where the ground is sunk round the letters so as to leave the letters or ornament in relief. From 1911 Encyclopædia Britannica at the calendar year-end, along with renewed investor focus on the U.S. current account deficit, appeared to weigh on weigh on Verb to be oppressive or burdensome to: the expectations that weigh so heavily on diplomats' wives Verb 1. the dollar-yen exchange rate early in the period. On January 12, the dollar gained more than four yen from the day's low of [Yen] 108.62 after the Bank of Japan reportedly intervened by selling yen in the foreign exchange market. Market participants interpreted the reported intervention as Japanese resistance to yen appreciation above [Yen] 110. Options prices indicated that market anxiety over the possibility of a rapid rise in the yen's value receded after the reported intervention, with 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. falling from a high of more than 22 percent on January 5 to about 17 percent by quarter-end. In addition, the premium for one-month yen call options over one-month yen put options, as measured by risk reversal Risk Reversal 1. In commodities trading, it is a hedge strategy that consists of selling a call and buying a put option. This strategy protects against unfavorable, downward price movements but limits the profits that can be made from favorable upward price movements. 2. prices, fell from a record high of nearly 4.5 percent on January 6 to approximately 1.2 percent by quarter-end, indicating less demand for protection against further yen appreciation. In the weeks following the reported intervention, the dollar traded in a range between [Yen] 110 and [Yen] 117, supported both by commentary from Japanese officials suggesting that "excessive yen strength" would elicit intervention and by expectations of continued disparity between U.S. and Japanese economic growth. However, several factors limited the dollar's upward momentum, including narrower long-term U.S.-Japanese interest rate differentials, concern over U.S. equity market valuation, and nervousness surrounding the Brazilian currency devaluation. The yield on the Japanese government benchmark bond Benchmark Bond A bond that provides a standard against which the performance of other bonds can be measured. Government bonds are almost always used as benchmark bonds. Also referred to as "benchmark issue" or "bellwether issue". (ten-year) rose 35 basis points from the start of the quarter, to a high of 2.36 percent on February 5, as Japanese investors reduced portfolio duration and 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. before their fiscal year-end and as market participants became increasingly concerned about the Japanese government's apparent acceptance of rising yields. The spread between yields of ten-year U.S. Treasuries and Japanese government bonds narrowed to a three-year low of 248 basis points by February 3. The dollar began to appreciate steadily against the yen after the Bank of Japan reduced the target for the overnight call rate from 25 to 15 basis points on February 12 and subsequently guided the rate to as low as 2 basis points. The dollar was further supported, by growing expectations of a shift toward quantitative monetary targeting in Japan, official efforts to contain the rapid rise in Japanese bond yields, and signs of persistent strength in the U.S. economy. On March 4, the dollar strengthened to a period high of [Yen] 123.75 and the spread between ten-year U.S. and Japanese bond yields peaked at 381 basis points, up 133 basis points from its February 3 low. Throughout March, movements in the dollar-yen exchange rate fluctuated in response to shifting expectations for monetary policy objectives and Japanese fiscal year-end dynamics. The dollar initially moved lower in response to U.S. economic data releases suggesting that inflation remained 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. . Meanwhile, the yen was supported by commentary from Japanese officials implying that a shift in monetary policy toward quantitative targets was unlikely in the near term and by substantial purchases of Japanese equities by international investors who were increasing the weight of Japanese assets in their portfolios. At the end of the quarter, the dollar-yen exchange rate drifted back to [Yen] 118.80, as purchases of Japanese equities subsided and Japanese accounts reportedly satisfied fiscal year-end foreign exchange requirements. 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 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 $15.2 billion for the Federal Reserve System and $15.2 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. . The U.S. monetary authorities invest all of their foreign currency balances in a variety of instruments that yield marketrelated rates of return and that have a high degree of liquidity and credit quality. A significant portion of these 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. . As of March 31, outright holdings of foreign government securities by U.S. monetary authorities totaled $7.3 billion. Japanese and German government securities held under repurchase agreement are arranged either through transactions executed directly in the market or through agreements with official institutions. Foreign government securities held under repurchase agreement by the U.S. monetary authorities totaled $12.8 billion at the end of the quarter. Foreign currency reserves are also invested in deposits at the Bank for International Settlements and in facilities at other official institutions. On February 3, 1999, the United States paid the equivalent of a $14.8 billion increase in its International Monetary Fund (IMF IMF See: International Monetary Fund IMF See International Monetary Fund (IMF). ) quota, which had been previously approved by the Congress. The payment was not an outlay of funds, but rather an exchange of monetary assets. In exchange for the payment, the United States received an increase in its IMF reserve position, which is an interest-beating asset. In accordance with agreed-upon IMF procedures, 25 percent of the quota increase, equal to about $3.7 billion, was transferred to the IMF in the form of foreign currency reserve assets Noun 1. reserve assets - capital held back from investment in order to meet probable or possible demands plural, plural form - the form of a word that is used to denote more than one , specifically euros held by the U.S. Treasury's Exchange Stabilization Fund (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. ). Simultaneously, the U.S. Treasury's general account reimbursed the ESF with dollars in an amount equivalent to the value of the euro reserve transfer. The remaining 75 percent of the quota increase, equal to about $11.1 billion, was paid through an increase in the U.S. letter of credit to the IMF and did not involve a flow of funds Flow of funds In the context of municipal bonds, refers to the statement displaying the priorities by which municipal revenue will be applied to the debt. In the context of mutual funds, refers to the movement of money into or out of a mutual funds or between or among . Separately, the U.S monetary authorities conducted an off-market currency transaction that was designed to redress imbalances in their respective foreign currency holdings. Imbalances had evolved over time both in terms of the overall level and currency composition of the foreign exchange reserves held by the Federal Reserve and the ESE ESE abbr. east-southeast Noun 1. ESE - the compass point midway between east and southeast east southeast Effective March 18, the Federal Reserve exchanged approximately $4.8 billion of euros for $1.4 billion of Japanese yen and $3.4 billion of U.S. dollars from the ESE The transaction was executed at prevailing market exchange rates. As designed, this transaction distributed the overall level of the U.S. monetary authorities' foreign reserve assets more evenly between the ESF and the Federal Reserve and left the resulting balances of euros and yen roughly equal for both accounts (see table 1). Foreign currency holding of U.S. monetary authorities based on current exchange rates. 1999:Q1 Millions of dollars
Balance,
Item Dec. 31, 1998 Net purchases
and sales(1)
FEDERAL RESERVE
SYSTEM OPEN
MARKET ACCOUNT
EMU euro 12,824.0 -4,780.5
Japanese yen 6,846.9 1,418.9
Total 19,670.9 -3,361.6
Interest receivables(5) 82.8 ...
Other cash flow from
investments(6) 14.8 ...
Total 19,768.5 -3,361.6
U.S. TREASURY EXCHANGE
STABILIZATION FUND (ESF)
EMU euro 6,494.4 1,081.1
Japanese yen 9,799.4 -1,407.0
Total 16,293.8 -325.9
Interest receivables(5) 44.3 ...
Other cash flow
from investments(6) 21.4 ...
Total 16,359.5 -325.9
Item Effect of Investment
sales(2) income
FEDERAL RESERVE
SYSTEM OPEN
MARKET ACCOUNT
EMU euro -18.7 118.7
Japanese yen 0 3.0
Total -18.7 121.7
Interest receivables(5) ... ...
Other cash flow from
investments(6) ... ...
Total -18.7 121.7
U.S. TREASURY EXCHANGE
STABILIZATION FUND (ESF)
EMU euro -10.4 45.9
Japanese yen 11.9 4.2
Total 1.5 50.1
Interest receivables(5)
Other cash flow ... ...
from investments(6) ... ...
Total 1.5 50.1
Interest
Currency accrual
Item valuation (net) and
adjustments(3) other(4)
FEDERAL RESERVE
SYSTEM OPEN
MARKET ACCOUNT
EMU euro -915.9 0
Japanese yen -318.7 0
Total -1,234.6 0
Interest receivables(5) ... -29.1
Other cash flow from
investments(6) ... 0.9
Total -1,234.6 -30.0
U.S. TREASURY EXCHANGE
STABILIZATION FUND (ESF)
EMU euro -374.4 0
Japanese yen -458.4 0
Total -832.8 0
Interest receivables(5) ... -12.0
Other cash flow
from investments(6) ... -3.0
Total -832.8 -15.0
Item Balance,
Mar. 31, 1999
FEDERAL RESERVE
SYSTEM OPEN
MARKET ACCOUNT
EMU euro 7,227.6
Japanese yen 7,950.1
Total 15,177.7
Interest receivables(5) 53.7
Other cash flow from
investments(6) 13.9
Total 15,245.3
U.S. TREASURY EXCHANGE
STABILIZATION FUND (ESF)
EMU euro 7,236.6
Japanese yen 7,950.1
Total 15,186.7
Interest receivables(5) 32.3
Other cash flow
from investments(6) 18.4
Total 15,237.4
Note. Figures may not sum to totals because of rounding. (1.) Purchases and sales reflect changes in the foreign currency holdings as a result of the rebalancing Rebalancing The process of realigning the weightings of one's portfolio of assets. Notes: For example, if your portfolio's proportion of stock has grown too large for your intended assets weightings and risk tolerance, you might rebalance by selling some stock and putting between the SOMA and ESF portfolios and a withdrawal of funds from the ESF euro portfolio to meet an IMF quota. (2.) Calculated using marked-to-market exchange rates; represents the difference between the sale 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 in addition to the gain or loss resulting from changes in the market values of the investments sold. See table 2 for realized profits and losses on sales of foreign currencies computed as the difference between the historic cost-of-acquisition exchange rate and the sale exchange rate, and the gain or loss resulting from the changes in the market values of the investments sold. (3.) Foreign currency balances are marked to market monthly at month-end exchange rates. (4.) Includes the ESF's payment to meet its IMF quota. (5.) Interest receivables for the ESF are as of February 28, 1999, and are revalued at February 28, 1999, month-end exchange rates. Interest receivables for the SOMA are carried at cost and are not marked to market until interest is paid. SOMA interest receivables 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. (6.) Cash flow differences from payment and collection of funds on Japanese Gensaki investments. 2. Net profits or losses (-) on U.S. Treasury and Federal Reserve foreign exchange operations, based on historical cost-of-acquisition exchange rates, 1999: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, 1998
EMU euro 998.5 96.6
Japanese yen 1,229.8 1,766.0
Total 2,228.3 1,862.6
Realized profits and losses
from foreign currency sales,
Jan. 1, 1999-Mar. 31,
1999(1)
EMU euro 55.7 -71.0
Japanese yen 0 208.0
Total 55.7 137.0
Valuation profits
and losses on
outstanding assets
and liabilities,
Mar. 31, 1999
EMU euro -10.6 -227.5
Japanese yen 911.2 1,123.3
Total 900.6 895.8
(1) See table 1 for an explanation of these gains. 3. Currency arrangements, March 31, 1999
Million of dollars
Institution Amount of Outstanding,
facility Mar. 31, 1999
Federal Reserve
reciprocal currency
arrangements
Bank of Canada 2,000 0
Bank of Mexico 3,000 0
Total 5,000 0
U.S. Treasury
Exchange Stabilization Fund
currency arrangements
Bank of Mexico 3,000 0
Total 3,000 0
This quarterly report describes U.S. Treasury and System foreign exchange operations for the period from January through March 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. Laura E Ambroseno was primarily responsible for preparation of the report.3 |
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