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 July 2000 through September 2000. Ryan Faulkner was primarily responsible for preparing the report. During the third quarter, the dollar appreciated 8.2 percent against the euro and 2.0 percent against the yen. On a trade-weighted basis, the dollar ended the quarter 4.1 percent stronger against the currencies of the United States' major trading partners. In addition, the euro depreciated Depreciated may refer to:
On September 22, the U.S. monetary authorities intervened in the foreign exchange markets, purchasing 1.5 billion euros against the dollar. The operation, which was divided evenly between the 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. Department'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. and the Federal Reserve System, was coordinated with 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 monetary authorities of Japan, Canada, and the United Kingdom. CURRENCY MOVEMENTS DOMINATED BY EURO WEAKNESS DURING THE FIRST HALF OF THE QUARTER During the first half of the quarter, the euro weakened weak·en tr. & intr.v. weak·ened, weak·en·ing, weak·ens To make or become weak or weaker. weak  en·er n. against the
major currencies, having depreciated 4.3 percent against the dollar and
1.5 percent against the yen, and neared the lows reached in May 2000.
The depreciation of the euro was widely attributed to market
expectations of continued cross-border investment flows out of the euro
area that were related to merger and acquisition announcements made in
July and August. According to according toprep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. the ECB, the euro area had net outflows of direct investment and portfolio investment in July 2000 of 11.3 billion [European Dollar] and 5.9 billion [European Dollar] respectively. The euro's depreciation during the first half of the quarter also coincided with uncertainty regarding the growth prospects for the euro area and the perceived risk that inflationary in·fla·tion·ar·y adj. Of, associated with, or tending to cause inflation: inflationary prices; inflationary policies. Adj. 1. pressures were growing. In addition, weaker-than-expected German business confidence in June and purchasing manager 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. surveys in July suggested to some 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. that the pace of growth in the euro area was moderating. However, higher-than-expected euro-area inflation for June and July 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 ECB would tighten monetary policy, with the implied yield on the three-month December 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. having risen 18 basis points, to a yield of 5.31 percent during the first half of the quarter. Rising import prices and higher oil prices were cited as the main factors behind the jump in headline inflation Headline inflation is a measure of the total inflation within an economy and is affected by areas of the market which may experience sudden inflationary spikes such as food or energy. . 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. , economic data releases during the first half of the quarter supported market expectations that the pace of U.S. economic growth was moderating. Among these data were the weaker-than-expected surveys for June and July from the National Association of Purchasing Managers, the 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. survey for July, and construction spending Construction Spending An economic indicator that measures the amount of spending towards new construction. Released monthly by the U.S. Department of Commerce's Census Bureau, it looks at residential and non-residential construction in the private sector, and state and federal at for June. During the first half of the quarter, market participants reduced their expectations for additional tightening of U.S. monetary policy before year-end amid signs of 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. inflation. Over this period, the implied yield on the December 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 declined 26 basis points, to 6.60 percent, and ended the quarter at 6.49 percent. Signs that growth could be moderating also led many market participants to lower U.S. earnings forecasts for the remainder of the year. U.S. equities were mixed during the first half of the quarter but then declined during the second half. On balance, the S&P 500 and the Nasdaq composite The Nasdaq Composite is a stock market index of all of the common stocks and similar securities (e.g. ADRs, tracking stocks, limited partnership interests) listed on the NASDAQ stock market, meaning that it has over 3,000 components. It is highly followed in the U.S. equity indexes fell 1.2 and 7.4 percent, respectively, during the third quarter. Short-dated dollar-euro interest rate differentials narrowed during the first half of the quarter but remained in favor of the dollar. The spread of the two-year dollar swap rate 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. over the two-year euro swap rate fell from 190 to 135 basis points during the quarter, extending the narrowing that began in early May when the spread was 245 basis points. The effect of narrowing interest rate differentials on the euro appeared to be overshadowed by the market's attention to potential capital flows out of the euro area. Currency option prices during the first half of the quarter indicated that market anxiety remained relatively low. During July and August, implied volatilities 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. for one-month options on the euro-dollar and euro-yen exchange rate pairs reached their lowest points of the year, averaging 11.2 and 13.4 percent, respectively, over these two months. In addition, prices of euro-dollar risk reversals 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. indicated continued demand for protection against euro appreciation, with one-month euro calls being favored over one-month euro puts. In comparison with the euro, the yen traded in a relatively narrow range against the dollar, between [yen] 105 and [yen] 110, in response to mixed evidence regarding Japanese economic conditions, strength in local equity markets, and speculation about the timing of an end to the Bank of Japan's near-zero interest rate policy. In July, the dollar was supported by diminishing expectations of a near-term increase in Japanese rates after the release of mixed economic data and several corporate bankruptcy announcements. Commentary from Bank of Japan officials and signs of improving economic conditions in August once again raised market expectations for an end to the near-zero interest rate policy. On August 11, the Bank of Japan raised its target for the overnight call rate to 0.25 percent. The reaction in the currency markets was relatively mild, and the yen weakened modestly against the dollar and euro amid speculation about the effect of higher rates on the Japanese economy. During the second half of August, the yen strengthened 2.3 and 5.1 percent against the dollar and euro, respectively, amid gains in Japanese equities and signs of continued economic recovery. Although the consumer price index data released in August renewed deflationary de·fla·tion n. 1. The act of deflating or the condition of being deflated. 2. A persistent decrease in the level of consumer prices or a persistent increase in the purchasing power of money because of a reduction in available concerns, other reports on economic activity, such as June data on machine orders, increased speculation that the Japanese economy continued to recover. The yen was also supported by investor interest in buying Japanese shares, 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. with a 4.4 percent rise in the Nikkei over the last two weeks of August. According to the Ministry of Finance, foreign investors bought [yen] 350 billion in Japanese stocks in August, marking the first time that they had been net purchasers of Japanese shares since March 2000. SHARP RISE OF CURRENCY MARKET VOLATILITY IN SEPTEMBER During the first two weeks of September, currency market volatility increased sharply in response to reported portfolio reallocations. In addition to expected outflows from the euro area, the repositioning repositioning Laparoscopic surgery The changing of a Pt's position during a procedure to improve access or visualization of the operative field, which may be linked to complications, as it changes anatomic planes of operation. Cf Laparoscopic surgery. of Japanese firms in anticipation of the September 30 fiscal-half year-end appeared to have been a major factor behind the sharp currency fluctuations. The depreciation of the euro reportedly prompted Japanese institutional investors Institutional Investor A non-bank person or organization that trades securities in large enough share quantities or dollar amounts that they qualify for preferential treatment and lower commissions. who had acquired euro assets at higher exchange rates to sell euros against the yen to hedge or liquidate To pay and settle the amount of a debt; to convert assets to cash; to aggregate the assets of an insolvent enterprise and calculate its liabilities in order to settle with the debtors and the creditors and apportion the remaining assets, if any, among the stockholders or owners of the euro-denominated debt holdings. As investors scaled back their positions, movements in the currency market were exacerbated. In the week after the ECB's decision to raise its main policy rate 25 basis points, to 4.5 percent on August 31, the euro depreciated 2.8 percent against the yen and 1.9 percent against the dollar. Market nervousness over additional bouts Bouts is the name of
Pressure on other currencies and capital markets also emerged, reflecting a decline in investor risk appetite. In addition to the Japanese repatriation Repatriation The process of converting a foreign currency into the currency of one's own country. Notes: If you are American, converting British Pounds back to U.S. dollars is an example of repatriation. flows, higher oil prices and signs of slower global growth also contributed to uncertainty in the currency markets, as speculation rose about the effect that higher oil prices would have on countries' monetary policies and the ability of some countries to attract international capital. Among the currencies affected were the New Zealand dollar Noun 1. New Zealand dollar - the basic unit of money in New Zealand dollar - the basic monetary unit in many countries; equal to 100 cents , the Australian dollar Noun 1. Australian dollar - the basic unit of money in Australia and Nauru dollar - the basic monetary unit in many countries; equal to 100 cents , the South African rand “ZAR” redirects here. For the former republic, see South African Republic. The rand is the currency of South Africa. It takes its name from the Witwatersrand (White-waters-ridge , and 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. , which depreciated 13.1, 9.1, 6.3, and 2.0 percent, respectively, against the U.S. dollar over the quarter. COORDINATED INTERVENTION TO PURCHASE EUROS IN THE MARKET On September 22, the Federal Reserve Bank of New York (FRBNY FRBNY Federal Reserve Bank of New York ) entered the market to purchase euros against dollars for the U.S. monetary authorities in a coordinated intervention operation initiated by the ECB. The Japanese, British, and Canadian monetary authorities also participated in the intervention, purchasing euros with their currencies. The operation began at 7:11 a.m., with the euro trading at 0.8750 against the dollar, 2.0 percent higher than the closing price the previous day, and at 93.20 against the yen, 1.6 percent higher than the previous day's close. The FRBNY Trading Desk Trading Desk A desk where transactions for buying and selling securities occur. Trading desks can be found in most organizations (banks, finance companies, etc.) involved in trading investment instruments such as equities, fixed-income securities, futures, commodities and foreign operated intermittently in·ter·mit·tent adj. 1. Stopping and starting at intervals. See Synonyms at periodic. 2. Alternately containing and empty of water: an intermittent lake. until 9:20 a.m. Over the course of the morning, the U.S. monetary authorities acquired 1.5 billion [European Dollar] against $1.34 billion. The total amount was evenly divided between the U.S. Treasury Department's Exchange Stabilization Fund and the Federal Reserve System. As the operation began, the U.S. Department of the Treasury issued the following statement: "At the initiative of the European Central Bank, the monetary authorities of the United States and Japan joined with the European Central Bank in concerted intervention in exchange markets, because of their shared concern about the potential implications of recent movements in the Euro for the world economy." Treasury Secretary Lawrence H. Summers repeated this statement later that morning during a previously scheduled press conference before the September 23 Group of Seven (G-7) meeting and noted that "British and Canadian authorities also took part in the operation, purchasing euros with their currencies." Secretary Summers also said that "Our policy on the dollar is unchanged. As I have said many times, a strong dollar is in the national interest of the United States." The euro rose as high as 0.9014 against the dollar and 96.17 against the yen before consolidating its gains just above $0.88 and [yen] 94.60. From Thursday's to Friday's close, the euro appreciated 2.4 and 3.2 percent against the dollar and yen respectively. Against 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, the euro rose 2.1 and 0.9 percent, respectively, over the same period. Although the dollar declined 2.3 percent against the euro from Thursday's to Friday's close, it appreciated by 1.3 percent against the yen over the same period. In the days after the intervention, the euro traded in a narrow range against the yen and the dollar. For the remainder of the third quarter, the eurodollar and euro-yen exchange pairs traded in a 0.7 and 1.0 percent range respectively. The implied volatility of one-month eurodollar options also declined, falling from 16.2 percent on September 22 to 13.4 percent at the quarter's close. Over the same period, the implied volatility of one-month euro-yen options declined from 16.9 to 14.9 percent. 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. At the end of the quarter, the current values of the 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 $15.7 billion for the Federal Reserve System and $15.7 billion for the Treasury's Exchange Stabilization Fund. 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 extent practicable practicable adj. when something can be done or performed. , the 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 September 29, direct holdings of foreign government securities totaled $8.5 billion, split evenly between the two authorities. Foreign government securities held under repurchase agreement totaled $9.3 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, 2000:Q3
Millions of dollars
Quarterly changes in
balances, by source
Item Balance,
June 30,
2000
Net Effect Investment
purchases of income
and sales(2)
sales(1)
FEDERAL RESERVE SYSTEM
OPEN MARKET ACCOUNT
(SOMA)
Euro 6,637.5 669.7 0.0 66.2
Japanese yen 8,877.9 0.0 0.0 0.7
Total 15,515.3 669.7 0.0 66.9
Interest receivables
(net)(5) 34.5 ... ... ...
Other cash flow from
investments(4) 4.6 ... ... ...
Total 15,554.4 669.7 0.0 66.9
U.S. TREASURY EXCHANGE
STABILIZATION
FUND (ESF)
Euro 6,634.7 669.7 0.0 66.2
Japanese yen 8,877.8 0.0 0.0 0.7
Total 15,512.5 669.7 0.0 66.9
Interest
receivables(5) 56.4 ... ... ...
Other cash flow from
investments(4) 4.7 ... ... ...
Total 15,573.6 669.7 0.0 66.9
Quarterly changes in
balances, by source
Item Balance,
Sept. 29,
2000
Currency Interest
valuation accrual
adjustments(3) and other(4)
FEDERAL RESERVE SYSTEM
OPEN MARKET ACCOUNT
(SOMA)
Euro -501.3 ... 6,872.1
Japanese yen -144.8 ... 8,733.7
Total -646.1 ... 15,605.8
Interest receivables
(net)(5) ... 32.3 66.8
Other cash flow from
investments(4) ... 4.6 0.0
Total -646.1 27.7 15,672.6
U.S. TREASURY EXCHANGE
STABILIZATION
FUND (ESF)
Euro -501.1 ... 6,869.5
Japanese yen -144.8 ... 8,733.8
Total -645.9 ... 15,603.2
Interest
receivables(5) ... 1.2 57.6
Other cash flow from
investments(4) ... -4.7 0.0
Total -645.9 -3.5 15,660.8
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.) 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:Q3
Millions of dollars
Federal U.S. Treasury
Reserve Exchange
System Open Stabilization
Period and item Market Account Fund
Valuation profits and losses on
outstanding assets and
liabilities, June 30, 2000
Euro -869.6 -1,086.3
Japanese yen 1,832.3 2,044.4
Total 962.7 958.2
Realized profits and losses
from foreign currency sales,
June 30, 2000-Sept. 29, 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, Sept. 29, 2000
Euro -1,370.9 -1,587.3
Japanese yen 1,687.5 1,899.7
Total 316.6 312.3
3. Reciprocal currency arrangements, September 29, 2000
Millions of dollars
Amount of Outstanding,
Institution facility Sept. 29, 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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