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 January 2000 through March 2000. Laura Sarlo was primarily responsible for preparation of the report. During the first quarter of 2000, the dollar appreciated 5.4 percent against the euro and 0.4 percent against the yen. U.S. monetary authorities did not intervene in the foreign exchange markets during the quarter. MODEST APPRECIATION OF THE DOLLAR On a trade-weighted basis, the dollar appreciated modestly, rising 2.6 percent, with most of this appreciation occurring relative to the European trading partners of 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 currency was supported by the ongoing strength in the U.S. economy and the perception that productivity growth was continuing. This view of the economy was 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. by the February 25 release of the fourth-quarter growth rate for gross domestic product of 6.9 percent, year-on-year (revised March 30 to 7.3 percent, year-on-year) and the March 7 release of the fourth-quarter growth rate for productivity of 6.4 percent, year-on-year. Meanwhile, the unemployment rate held near the January low of 4.0 percent, year-on-year. The resilience resilience (r  ·zilˑ·yens),n of U.S. asset markets, despite volatility in equities and bonds, also appeared to support the dollar. [Graph omitted] Indications of continued strong economic activity supported market expectations for a gradual series of rate increases by the Federal Reserve, and the implied yield of the June eurodollar contract rose 18 basis points, to 6.65 percent. The Federal Open Market Committee (FOMC See Federal Open Market Committee. FOMC See Federal Open Market Committee (FOMC). ) raised its target for the 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. 25 basis points on both February 2 and March 21, moving it from 5.50 to 6.00 percent. [Graph omitted] 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 AGAINST THE DOLLAR AND THE YENThe euro depreciated Depreciated may refer to:
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. low of $0.9390 on February 28 and lingering lin·ger v. lin·gered, lin·ger·ing, lin·gers v.intr. 1. To be slow in leaving, especially out of reluctance; tarry. See Synonyms at stay1. 2. below $1.00 for much of the quarter, despite a brief rally during the third week of February. The euro's depreciation was relatively broad based, falling 5.2, 4.8, and 3.6 percent against the dollar, yen, and British pound, respectively, as investors reportedly continued to diversify diversify To acquire a variety of assets that do not tend to change in value at the same time. To diversify a securities portfolio is to purchase different types of securities in different companies in unrelated industries. portfolios away from the euro area. The euro--yen exchange rate was particularly volatile, as the euro depreciated more than 11 percent against the yen from late February through the end of March, when the exchange rate closed below [yen] 100 per euro for the first time. [Graph omitted] Several factors contributed to the weakness of the euro, including continued expectations that euro-area economic growth would lag that of other parts of the world, continued cross-border investment flows out of the euro area, and market participants' concerns over foreign exchange policy and the pace of euro-area structural reform. These factors seemed to prompt longer-term investors to scale back long-held euro positions during the first quarter of 2000 after a portfolio and direct investment outflow of 168.6 billion [European dollar] in 1999.(1) The persistent growth differential between the U.S. and euro-area economies continued to weigh on weigh on Verb to be oppressive or burdensome to: the expectations that weigh so heavily on diplomats' wives Verb 1. the euro, and the March 9 announcement of euro-area GDP GDP (guanosine diphosphate): see guanine. growth of 3.1 percent, year-on-year disappointed many market participants The term market participant is used in United States constitutional law to describe a U.S. State which is acting as a producer or supplier of a marketable good or service. When a state is acting in such a role, it may permissibly discriminate against non-residents. . Although the premium for ten-year 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. over German government securities narrowed 31 basis points during the quarter, the euro failed to benefit. Shorter-term interest rate differentials were relatively steady, as investors continued to anticipate a similar amount of tightening 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. ) and the FOMC. The ECB increased its main refinancing Refinancing An extension and/or increase in amount of existing debt. rate 50 basis points to 3.50 percent in two quarter-point steps on February 3 and March 16. In addition, market uncertainty over the course of structural reform may have pressured the euro lower; while many investors perceived progress on the issue of tax reform, labor market labor market A place where labor is exchanged for wages; an LM is defined by geography, education and technical expertise, occupation, licensure or certification requirements, and job experience rigidities in several nations continued to concern market participants. More broadly, political tension within the 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 after the formation of a new government in Austria and concerns about the implications of European Union expansion were also seen as negatively affecting the euro. REEMERGENCE OF YEN STRENGTH The yen depreciated during the first half of the quarter and appreciated during the second half, ending the quarter on net 0.4 percent weaker against the dollar and 5.1 percent stronger against the euro. The Japanese monetary authorities publicly confirmed the official selling of yen on several occasions. [Graph omitted] 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. during the first seven weeks of the year,
breaching [yen] 111 and [yen] 109 against the dollar and the euro
respectively. Market participants reportedly sold yen to establish short
positions, as comments by Japanese officials contributed to the
market's growing perception that fourth-quarter economic data might
indicate a second consecutive quarter of negative year-on-year growth.
Market concern that the Group of Seven (G-7), at its January meeting,
might address the yen's longer-term appreciation trend may also
have dampened the currency's appreciation early in the quarter. The
G-7 statement also reduced market expectations for any near-term
increase in Japanese rates. Postponement of a banking reform measure to
institute a cap on deposit insurance and the proposal of a tax on
Japanese banks located in Tokyo also reportedly contributed to the
yen's depreciation. Some traders noted that a Moody's
announcement on February 17 of a review and possible downgrade DowngradeA negative change in the rating of a security. Notes: For example, an analyst may downgrade a stock from strong buy to buy, or a bond rating agency may downgrade a bond from AAA to AA. of Japan's domestic-currency credit rating further weighed on sentiment toward the yen. From February 22 through the end of the quarter, however, the yen strengthened by as much as 7.9 and 13.2 percent against the dollar and the euro respectively. Although a release on March 12 indicated that Japanese GDP had declined 1.4 percent year-on-year during the fourth quarter, stronger-than-expected data on capital spending capital spending Spending for long-term assets such as factories, equipment, machinery, and buildings that permits the production of more goods and services in future years. and machinery orders gave rise to some market optimism about the prospects for Japanese economic recovery. Reallocation Noun 1. reallocation - a share that has been allocated again allocation, allotment - a share set aside for a specific purpose 2. reallocation of portfolio investments in favor of Japanese assets also appeared to support the yen against both the dollar and the euro. According to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. Japan's Ministry of Finance, foreign investors purchased [yen] 1.17 trillion in Japanese stocks through the end of February, compared with [yen] 667 billion during the first two months of 1999. Japanese equity markets continued to attract inflows, helping the Nikkei close above 20,000 on February 9 for the first time since July 1997. Although foreign inflows diminished from mid-March, there were net equity inflows of [yen] 800.4 billion on the quarter. The Nikkei and the technology-laden JASDAQ Jasdaq See: Japanese Association of Securities Dealers Automated Quotation System rose 7.4 and 12.0 percent, respectively, during the period. [Graph omitted] According to some market sources, the yen's appreciation in mid-to-late February generated losses on the significant short yen positions established in February and prompted investors to rapidly scale back such holdings by purchasing yen. Reported 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. transactions and expectations for such flows also boosted the yen against other currencies, as Japanese investors reduced foreign holdings ahead of the March 31 Japanese 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. . Throughout the period, however, many participants remained wary of the possibility of further Japanese intervention. In anticipation of Japanese capital outflows Capital outflow is an economic term describing capital flowing out of (or leaving) a particular economy. Outflowing capital can be caused by any number of economic or political reasons but can often originate from instability in either sphere. after the fiscal year-end, some market participants established long euro positions against the yen during the final week of the quarter. However, the yen's continued appreciation prompted investors to cut back these positions, contributing to the yen's 3.2 percent strengthening against the euro and the breaking of the [yen] 100-per-euro level during the final day of the quarter. Foreign exchange markets were volatile over the period and volatility implied by currency options fluctuated. At the beginning of the quarter, the 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. of one-month options declined as trading conditions returned to normal following the uneventful year-end. Later in the period, market participants reported that uncertainty over the near-term direction of the euro and the course of the yen ahead of the Japanese fiscal year-end contributed to elevated volatility levels. [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 $15.8 billion for the Federal Reserve System and $15.8 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 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 March 31, direct holdings of foreign government securities totaled $8.6 billion, split evenly between the two authorities. Foreign government securities held under repurchase agreement totaled $13.6 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:Q1
Millions of dollars
Quarterly changes
in balances,
by source
Item Balance,
Dec. 31, 1999
Net
purchases Effect
and of
sales(1) sales(2)
FEDERAL RESERVE SYSTEM
OPEN MARKET ACCOUNT
(SOMA)
Euro 6,870.6 0.0 0.0
Japanese yen 9,221.5 0.0 0.0
Total 16,092.1 0.0 0.0
Interest receivables(4) 48.0 ... ...
Total 16,140.1 ... ...
U.S. TREASURY EXCHANGE
STABILIZATION FUND (ESF)
Euro 6,868.5 0.0 0.0
Japanese yen 9,221.5 0.0 0.0
Total 16,090.0 0.0 0.0
Interest receivables(4) 78.6 ... ...
Total 16,168.6 ... ...
Quarterly changes in
balances, by source
Balance,
Item Mar. 31, 2000
Currency
Investment valuation
income adjustments(3)
FEDERAL RESERVE SYSTEM
OPEN MARKET ACCOUNT
(SOMA)
Euro 67.8 -341.1 6,597.4
Japanese yen 1.0 -51.1 9,171.4
Total 68.8 -392.2 15,768.7
Interest receivables(4) ... ... 34.3
Total ... ... 15,803.0
U.S. TREASURY EXCHANGE
STABILIZATION FUND (ESF)
Euro 67.0 -340.9 6,594.5
Japanese yen 1.0 -51.1 9,171.4
Total 68.0 -392.0 15,765.9
Interest receivables(4) ... ... 59.8
Total ... ... 15,819.8
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.) 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: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, 1999
Euro -510.0 -726.9
Japanese yen 2,178.1 2,390.2
Total 1,668.1 1,663.3
Realized profits and losses
from foreign currency sales,
Dec. 31, 1999-Mar. 31, 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,
Mar. 31, 2000
Euro -851.1 -1,067.8
Japanese yen 2,126.9 2,339.1
Total 1,275.8 1,271.3
3. Federal Reserve reciprocal currency arrangements,
March 31, 2000
Millions of dollars
Amount of Outstanding,
Institution facility Mar. 31, 2000
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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