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 October through December 1999. Deborah L. Leonard was primarily responsible for preparation of the report. During the fourth quarter of 1999, the dollar depreciated Depreciated may refer to:
CURRENCY MOVEMENTS DOMINATED BY YEN STRENGTH AND EURO WEAKNESS Over the course of the fourth quarter, the yen rose steadily to a four-year high of [yen] 101.64 against the dollar and an all-time high of [yen] 102.60 against the euro. The yen's appreciation accompanied continued perceptions of economic improvement in Japan, capital flows into Japanese assets, and uncertainty regarding the prospects for additional stimulus by the Bank of Japan. The movement prompted several publicly confirmed interventions in the foreign exchange markets by the Japanese monetary authorities. Market participants cited modest signs of improvement in several key Japanese economic data reports and revisions to previous reports as evidence that Japan's economic cycle was turning. Tankan business sentiment indexes sentiment index A numerical guide to investor feeling toward the securities markets that is constructed to determine whether certain segments of the investment community are bullish or bearish. in September and December of -22 and -17, respectively, reached the survey's highest levels in two years, although the improvement mainly reflected the results for large manufacturing firms. On November 15, Japan's third-quarter industrial production was reported to have risen 3.9 percent since the previous quarter. On December 6, Japan's third-quarter gross domestic product was reported to have contracted 1.0 percent for the quarter; second-quarter GDP GDP (guanosine diphosphate): see guanine. growth, however, was revised upward from 0.1 to 1.0 percent. Market participants also noted three consecutive positive reports of the Economic Planning economic planning, control and direction of economic activity by a central public authority. In its modern usage, economic planning tends to be pitted against the laissez-faire philosophy which developed in the 18th cent. Agency's monthly leading and coincident co·in·ci·dent adj. 1. Occupying the same area in space or happening at the same time: a series of coincident events. See Synonyms at contemporary. 2. diffusion indexes Diffusion Index 1. A measure of the percentage of stocks that have advanced in price or are showing a positive momentum over a defined period. It is used in the technical analysis of stocks. 2. . The Japanese government's November 11 announcement of an [yen] 18 trillion supplementary spending package, including an expected [yen] 6.5 trillion of actual spending, was perceived as demonstrating an ongoing government commitment to employing fiscal stimulus measures. At the outset of the quarter, attention focused on the prospects 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 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 further. The Bank of Japan's announcements of measures aimed at improving the flexibility of its operations and at providing ample liquidity over the turn of the year were perceived as introducing technical changes that did not alter the stance of Japanese monetary policy. Short-term interest rates Short-term interest rates Interest rates on loan contracts-or debt instruments such as Treasury bills, bank certificates of deposit or commerical paper-having maturities of less than one year. Often called money market rates. in Japan rose marginally over the quarter, at times affected by continued evidence of improving economic conditions, strength in the equity markets, and comments from Bank of Japan officials regarding the extraordinary nature of the zero interest rate policy. Expressing growing confidence in prospects for an upswing Upswing An upward turn in a security's price after a period of falling prices. in Japan's economy, foreign investors increased their direct and portfolio capital investments in Japan. The Nikkei rose to a two-year high while broader Japanese equity indexes rose even more sharply, buoyed by evidence of corporate restructuring and the global rally in the equity markets. As foreign portfolio inflows continued, the Ministry of Finance reported that foreign direct investment rose to [yen] 1.3 trillion during the first half of 1999, more than twice the amount during the same period in 1998. In the meantime Adv. 1. in the meantime - during the intervening time; "meanwhile I will not think about the problem"; "meantime he was attentive to his other interests"; "in the meantime the police were notified" meantime, meanwhile , the yen's persistent appreciation continued to reduce the value of unhedged foreign assets for Japanese investors, further encouraging hedging or liquidation The collection of assets belonging to a debtor to be applied to the discharge of his or her outstanding debts. A type of proceeding pursuant to federal Bankruptcy of those positions. Some Japanese investors who were reluctant to maintain large overseas exposures amid year-end uncertainty, reportedly repatriated capital or curtailed investment outflows before the century date change, thus creating additional demand for yen. In Europe, perceptions that the euro-area economic outlook had improved, views that there were upside risks of inflation, and commentary from 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. ) officials prompted heightened expectations of an interest rate hike by the ECB during the fourth quarter. Expectations solidified after October 27, when year-on-year M3 money supply in the euro area was reported to have grown 6.1 percent in September, outpacing the ECB's target rate of 4.5 percent. On November 4, the ECB raised its two-week refinancing rate 50 basis points, to 3.00 percent. Commenting after the action, ECB President Duisenberg said that the "timely rise [in interest rates] will avoid the need for a bigger rise later." After the move, the yield implied by the March 2000 Euribor 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 to its period low of 3.46 percent, and European sovereign bond 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. yields fell, as market participants noted that the rate rise helped to mitigate expectations of a sustained cycle of monetary tightening in Europe. Yields rebounded in the second half of the quarter, with ten-year sovereign 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". yields rising approximately 50 basis points but remaining below their period highs, amid global declines in bond prices and as economic data pointed to stronger European growth. Germany's 3.2 percent rise in October manufacturing orders, 1.7 percent rise in industrial production the same month, and a better-than-expected November business climate survey by the German IFO IFO abbr. identified flying object Institute all supported the improved expectations for growth. Annualized annualized Of or relating to a variable that has been mathematically converted to a yearly rate. Inflation and interest rates are generally annualized since it is on this basis that these two variables are ordinarily stated and compared. third-quarter growth in the euro area of 2.3 percent also exceeded consensus forecasts. Despite higher domestic interest rates and economic growth prospects, the euro weakened steadily against the dollar and the yen. On December 2 and 3, the euro briefly dipped below $1.00. Throughout the quarter, the effect on the euro of widening U.S.-European yield differentials and reported global portfolio reallocations appeared to outweigh Europe's improving growth outlook and robust gains in its equity markets. In the first half of the quarter, market participants noted sizable euro sales as portfolio managers--who reportedly had relatively high euro weightings relative to their benchmarks--moved toward more neutral currency positions in early preparation for the year-end. Net speculative positions on currency futures Currency Futures A transferable futures contract that specifies the price at which a specified currency can be bought or sold at a future date. Notes: Currency future contracts allow investors to hedge against foreign exchange risk. exchanges, as well as survey flow data, appeared to show similar patterns. Japanese investors reportedly continued to hedge their European investments to protect against foreign exchange losses on capital investments. Market participants also noted the resilience of U.S. asset markets and widening yield differentials as factors weighing on the euro. The annualized yield spread between the benchmark ten-year 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. and German bund Bund The German government's federal bond. The bund is issued to the public as a way for the German government to finance its spending. Notes: The bund is like the Treasury bonds in the U.S. They are government-backed instruments of the highest quality. widened from 89 to 119 basis points by the end of the quarter. European sovereign bonds outperformed 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. as market participants estimated that (1) inflation in Europe would remain relatively low, (2) that moderate European rate hikes in the future were already reflected in prices, and (3) that a more pronounced cycle of monetary tightening in the United States was under way. Lastly, some cited concerns that intervention by European governments in mergers and acquisitions and bankruptcy proceedings bankruptcy proceedings n. the bankruptcy procedure is: a) filing a petition (voluntary or involuntary) to declare a debtor person or business bankrupt, or, under Chapter 11 or 13, to allow reorganization or refinancing under a plan to meet the debts of the party could signal a slowing in corporate restructuring efforts in the euro area. DOLLAR SUPPORTED BY EXPECTATIONS FOR SUSTAINED U.S. GROWTH Despite its mixed performance against the euro and the yen, the dollar's value remained relatively stable on a trade-weighted basis. When measured broadly against the currencies of major trading partners, the dollar appreciated 0.8 percent, while the yen appreciated 6.3 percent, and the euro depreciated 4.4 percent during the fourth quarter. The relative resilience of U.S. asset markets amid tightening monetary conditions in the United States provided underlying support for the dollar. Yields on U.S. Treasury securities rose to their highest levels in more than two years after the Federal Open Market Committee's (FOMC See Federal Open Market Committee. FOMC See Federal Open Market Committee (FOMC). ) adoption of a tightening bias at its October 5 meeting and its decision to raise 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 5.25 to 5.50 percent on November 16. Data releases throughout the quarter were perceived to show strong, non-inflationary U.S. growth that contributed to a 20-basis-point flattening
The flattening, ellipticity, or oblateness of an oblate spheroid is the "squashing" of the spheroid's pole, down towards its equator. of the two-to-thirty-year Treasury coupon curve to a fifteen-month low of 23 basis points. While data continued to show somewhat modest upward pressures on earnings, producer prices, and consumer prices, stronger-than-expected growth, and consumption data raised market expectations that subsequent rate hikes would moderate the pace of U.S. growth. The third-quarter employment cost index, reported on October 28, fell from 1.1 percent in the second quarter to 0.8 percent in the fourth quarter. Employment reports released during the quarter generally showed lower-than-expected gains in 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. and average hourly earnings. However, third-quarter GDP growth of 4.8 percent and a deflator Deflator A statistical factor used to convert current dollar purchasing power into inflation-adjusted purchasing power. Enables the comparison of prices while accounting for inflation in two different time periods. of 0.9 percent, reported on October 28, were revised upward to 5.5 percent and 1.1 percent, respectively, on November 24. September and October retail sales figures sales figures npl → cifras fpl de ventas , excluding autos, were also higher than expected. Market participants perceived that the tone of the FOMC's December 21 directive was relatively hawkish, even though the Committee maintained its symmetric directive "in light of market uncertainties associated with the century date change." By the end of the quarter, the implied yield on the February federal funds futures contract had risen 37 basis points, to 5.79 percent. Despite rising bond yields, U.S. and global equity markets surged to record highs as market participants. expressed increased confidence in the prospects tot sustained global growth and as global liquidity remained high. The Dow Jones Industrial Average Dow Jones Industrial Average The best known U.S. index of stocks. A price-weighted average of 30 actively traded blue-chip stocks, primarily industrials including stocks that trade on the New York Stock Exchange. and the S&P 500 indexes rose 11.2 and 14.5 percent, respectively, while the Nasdaq skyrocketed 48.2 percent. The momentum contributing to the Nasdaq's performance accelerated after the October 28 release of third-quarter GDP and employment cost figures, as well as Chairman Greenspan's speech on the same day noting the contributions that technology has made to U.S. productivity and recent economic performance. Higher interest rates in the United States did not appear to weigh negatively on sentiment toward emerging-market assets. On the contrary, confidence in global growth prospects fueled investor interest in emerging-market assets throughout the quarter. Spreads between emerging-market sovereign debt and comparable U.S. Treasury securities narrowed, with the spread between J.P. Morgan's Emerging Market Bond Index (EMBI EMBI Emerging Markets Bond Index EMBI Emergency Management for Business & Industry +) sovereign yield and U.S. Treasury securities having fallen 274 basis points, to 824 basis points--its lowest level since August 1998. Moreover, Latin American and Asian telecommunication stocks rallied along with other global technology shares, as growth in those regions continued to improve from technology exports and gains in productivity. ORDERLY FINANCIAL MARKETS BEFORE THE Y2K See Y2K problem and Y2K compliant. Y2K - Year 2000 TURN As the year's end approached, uncertainties associated with the century date change did not create any visible distress in the foreign exchange market. Overall, 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. reportedly remained within their average ranges for 1999 until well into December--longer than many would have predicted earlier in the year. By December 31, however, trading volumes had ground nearly to a halt as market participants postponed all but absolutely necessary transactions until the new year. Trading activity appeared orderly throughout the period, although bid-ask spreads Bid-Ask Spread The amount by which the ask price exceeds the bid. Notes: For example, if the bid price is $20 and the ask price is $21 then the "bid-ask spread" is $1. on major currency pairs more than doubled in the last trading days Last Trading Day The final day that a futures or options contract may trade or be closed out before delivery of the underlying asset must occur. Notes: If the buying and selling parties do not arrange an alternate agreement, the physical commodity must be delivered from of the year. However, volatility implied by currency options remained in recent ranges in the final weeks of the year as spot market activity diminished. Although some portfolio managers who were concerned about year-end liquidity reportedly moved toward more neutral positions relative to their benchmarks early in the period, other indications by the end of the quarter suggested that broadly based risk aversion risk aversion The tendency of investors to avoid risky investments. Thus, if two investments offer the same expected yield but have different risk characteristics, investors will choose the one with the lowest variability in returns. was not prevalent in the financial markets. Global stock markets rallied amid relatively heavy trading volume through December, confidence in prospects for emerging-market growth prospects improved, and credit and swap spreads Swap Spread 1. The difference between the negotiated and fixed rate of a swap. The spread is determined by characteristics of market supply and creditor worthiness. 2. narrowed. 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 $16.1 billion for the Federal Reserve System and $16.2 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 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 facilities at other official institutions. As of December 31, direct holdings of foreign government securities totaled $9.2 billion, split evenly between the two authorities. Foreign government securities held under repurchase agreement totaled $13.7 billion at the end of the quarter and were also split evenly between the two authorities. [GRAPHS OMITTED] 1. Foreign currency holdings of U.S. monetary authorities based on current exchange Rates, 1999:Q4 Millions of dollars
Quarterly changes
in balances,
by source
Balance,
Item Sept. 30, 1999(1) Net purchases
and sales(2)
FEDERAL RESERVE SYSTEM
OPEN MARKET ACCOUNT
(SOMA)
EMU euro 7,221.8 0.0
Japanese yen 8,831.9 0.0
Total 16,053.7 0.0
Interest receivables, net(5) 64.5 ...
Total 16,118.2 0.0
U.S. TREASURY EXCHANGE
STABILIZATION FUND (ESF)
EMU euro 7,219.1 0.0
Japanese yen 8,831.8 0.0
Total 16,050.9 0.0
Interest receivables(5) 66.2 ...
Total 16,117.1 0.0
Quarterly changes
in balances, by source
Item Effect of Investment
sales(3) income
FEDERAL RESERVE SYSTEM
OPEN MARKET ACCOUNT
(SOMA)
EMU euro 0.0 38.9
Japanese yen 0.0 0.7
Total 0.0 39.6
Interest receivables, net(5) ... ...
Total 0.0 39.6
U.S. TREASURY EXCHANGE
STABILIZATION FUND (ESF)
EMU euro 0.0 39.4
Japanese yen 0.0 0.7
Total 0.0 40.1
Interest receivables(5) ... ...
Total 0.0 40.1
Quarterly changes
in balances, by source
Currency
Item valuation Interest accrual
adjustments(4) and other
FEDERAL RESERVE SYSTEM
OPEN MARKET ACCOUNT
(SOMA)
EMU euro -390.1 0.0
Japanese yen 388.9 0.0
Total -1.2 0.0
Interest receivables, net(5) -16.5
Total -1.2 -16.5
U.S. TREASURY EXCHANGE
STABILIZATION FUND (ESF)
EMU euro -390.0 0.0
Japanese yen 389.0 0.0
Total -1.0 0.0
Interest receivables(5) ... 12.4
Total -1.0 12.4
Balance,
Dec. 31, 1999
Item
FEDERAL RESERVE SYSTEM
OPEN MARKET ACCOUNT
(SOMA)
EMU euro 6,870.6
Japanese yen 9,221.5
Total 16,092.1
Interest receivables, net(5) 48.0
Total 16,140.1
U.S. TREASURY EXCHANGE
STABILIZATION FUND (ESF)
EMU euro 6,868.5
Japanese yen 9,221.5
Total 16,090.0
Interest receivables(5) 78.6
Total 16,168.6
NOTE. Earlier period figures have been reclassified to the current presentation, (1.) 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 in the amounts of $13.4 million and $13.3 million for the Federal Reserve and 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. , respectively, are not included. These amounts are cash flow differences from payment and collection of funds between quarters. (2.) 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. (3.) This figure is calculated using marked-to-market exchange rates; it 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. 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 as the difference between the historical cost-of-acquisition exchange rate and the sale exchange rate, are reflected in table 2. (4.) Foreign currency balances are marked-to-market monthly at month-end exchange rates. (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. Interest receivables for the Federal Reserve System are net of unearned interest collected. ... 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:Q4 Millions of dollars
Federal
Reserve
Period and item System Open
Market Account
Valuation profits and losses on
outstanding assets and liabilities,
Sept. 30, 1999
EMU euro -119.9
Japanese yen 1,775.8
Total 1,655.9
Realized profits and losses
from foreign currency sales,
Sept. 30, 1999-Dec. 31, 1999
EMU euro 0.0
Japanese yen 0.0
Total 0.0
Valuation profits and losses on
outstanding assets and liabilities,
Dec. 31, 1999
EMU euro -510.0
Japanese yen 2,178.1
Total 1,668.0
U.S. Treasury
Exchange
Period and item Stabilization
Fund
Valuation profits and losses on
outstanding assets and liabilities,
Sept. 30, 1999
EMU euro -336.9
Japanese yen 1,988.0
Total 1,651.1
Realized profits and losses
from foreign currency sales,
Sept. 30, 1999-Dec. 31, 1999
EMU euro 0.0
Japanese yen 0.0
Total 0.0
Valuation profits and losses on
outstanding assets and liabilities,
Dec. 31, 1999
EMU euro -726.9
Japanese yen 2,390.2
Total 1,663.4
NOTE. Components may not sum to totals because of rounding. 3. Currency arrangements, December 31, 1999 Millions of dollars
Amount of Outstanding,
Institution facility Dec. 31, 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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