Treasury and Federal Reserve foreign exchange operations.

This quarterly report, covering the period February through April 1993, provides information on Treasury and System foreign exchange operations. It was presented by William J. McDonough, Executive Vice President of the Federal Reserve Bank of New York and Manager of the System Open Market Account. John W. Dickey was primarily responsible for preparation of the report.(1)

The dollar depreciated modestly against most major currencies during the February-April period but declined significantly against the Japanese yen amid concerns relating to the growing Japanese trade surplus. Over the period, the dollar declined 1.6 percent against the German mark, 10.9 percent against the Japanese yen, and 3.2 percent on a trade-weighted basis.(2)

On April 27, the U.S. monetary authorities intervened in the foreign exchange markets, purchasing $200 million against the yen in amounts shared equally by the Treasury and the Federal Reserve.

DEVELOPMENTS IN DOLLAR EXCHANGE MARKETS

The Japanese yen appreciated throughout the period. Japanese trade data released on February 5 indicated that the 1992 Japanese current account surplus was materially higher than in 1991. Subsequent observations about the contribution that the exchange rate might make to correct Japan's widening trade surplus, and a perceived acquiescence to gradual yen appreciation by Japanese officials, contributed to the dollar's decline from its period high of 125.20[yen] on February 2.

The yen's appreciation was particularly pronounced in February, when many market participants expected the Group of Seven (G-7) to announce support for a stronger yen after its meeting at the end of the month. However, the meeting did not result in a call for yen appreciation.

The yen's rise paused temporarily throughout most of March in response to indications that policymakers were focusing on the merits of revitalizing Japan's economy as a means both to address Japan's current account surplus and to promote more satisfactory economic performance globally. Consequently, market attention shifted to the progress the Japanese government was making in developing a new supplementary fiscal package to stimulate the Japanese economy as well as to the anticipated repatriation of funds by Japanese companies ahead of the fiscal year-end.

The yen's rise resumed in late March. Comments by Japanese officials on March 31 that yen appreciation was inevitable and acceptable if it remained gradual, along with the April 13 announcement that the fiscal stimulus package of 13.2[yen] trillion would allocate a larger-than-expected portion to immediate economic recovery, gave continued strength to the yen through April.

1. Federal Reserve reciprocal currency arrangements
Millions of dollars
                    Institution                 Amount of
                                                 facility.
                                               April 30, 1993
Austrian National Bank                               250
National Bank of Belgium                           1,000
Bank of Canada                                     2,000
National Bank of Denmark                             250
Bank of England                                    3,000
Bank of France                                     2,000
Deutsche Bundesbank                                6,000
Bank of Italy                                      3,000
Bank of Japan                                      5,000
Bank of Mexico                                       700
Netherlands Bank                                     500
Bank of Norway                                       250
Bank of Sweden                                       300
Swiss National Bank                                4,000
Bank for International Settlements
Dollars against Swiss francs                         600
Dollars against other authorized European
    currencies                                     1,250
Total                                             30,100

The dollar hit a historical low of 109.15[yen] against the yen on April 27. Later that day, the U.S. monetary authorities purchased $200 million against the yen in operations coordinated with another monetary authority. U.S. officials also indicated that

[t]he Administration believes that exchange rates

should reflect fundamentals, and attempts to artificially

influence or manipulate exchange rates

are inappropriate. Moreover, excessive volatility

is counterproductive for growth. Therefore we

are monitoring developments closely and stand

ready to cooperate in exchange markets with our

G-7 partners as conditions may warrant.

In response, the dollar stabilized and then traded between 112.10[yen] and 111.05[yen] for the remaining days of the period.

The dollar-mark exchange rate was relatively stable. The dollar traded between DM1.6730, reached on March 11, and DM1.5640, reached on April 26.

3. Net profits or losses (-) on U.S. Treasury
and Federal Reserve foreign exchange operations (1)
Millions of dollars
                                                   U.S. Treasury
                                        Federal      Exchange
Period and Item                         Reserve    Stabilizadon
                                                      Fund
Valuation profits and losses on
outstanding assets and liabilities
as of January 31, 1993                  2,868.4       1,749.9
Realized, February 1-April
30, 1993                                   22.0          22.0
Valuation profits and losses on
outstanding assets and liabilities
as of April 30, 1993                    4,152.0       3,221.8
1. Data are on a value-date basis.

The German Bundesbank reduced its official discount rate and its Lombard rate each 100 basis points in a series of steps undertaken during the February-April period to stimulate the weakening German economy. After official rate reductions, the mark depreciated slightly against many European currencies. Tensions within the European exchange rate mechanism diminished, although the Spanish peseta faced repeated selling pressure.

OTHER OPERATIONS

The Federal Reserve and the Treasury's exchange stabilization fund (ESF) each realized profits of $22.0 million from the sales of yen in the market. Cumulative bookkeeping or valuation gains on outstanding foreign currency balances as of the end of April were $4,152.0 million for the Federal Reserve and $3,221.8 million for the ESF.

The Federal Reserve and the ESF regularly invest their foreign currency balances in a variety of instruments that yield market-related rates of return and that have a high degree of liquidity and credit quality. A portion of the balances is invested in securities issued by foreign governments. As of the end of April, the Federal Reserve and the ESF held either outright or under repurchase agreements $9,376.6 million and $9,438.9 million respectively in foreign government securities valued at end-of-period exchange rates.

In other operations, the Treasury, through the ESF, participated in a $900 million multilateral facility to assist Peru in repaying its arrears to international creditors. The Treasury's share of the facility was $470 million, established by a special arrangement with Peru on March 9. The total amount of the facility was drawn on March 18 and repaid in full on the same day. The facility expired on March 31. (1) The charts for the report are available from Publications Services, Board of Governors of the Federal Reserve System, mail stop 138, Washington, DC 20551. (2) The dollar's movements on a trade-weighted basis are measured using an index developed by the staff of the Board of Governors of the Federal Reserce System.