Treasury and Federal Reserve foreign exchange operations.This report, presented by Dino Kos, 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 US. Department of the Treasury and the Federal Reserve System for the period from July 2001 through September 2001. Evangeline Sophia Drossos was primarily responsible for preparing the report. During the third quarter, the dollar depreciated Depreciated may refer to:
tr.v. pro·tract·ed, pro·tract·ing, pro·tracts 1. To draw out or lengthen in time; prolong: disputants who needlessly protracted the negotiations. 2. than previously expected, which generally weighed on the dollar. The attacks heightened pre-existing concerns about the weakness of the U.S. economy and lent further momentum to the general trends that prevailed earlier in the quarter. The U.S. monetary authorities did not intervene in the foreign exchange markets during this quarter. After the terrorist attacks, the Federal Reserve established thirty-day reciprocal swap arrangements Swap arrangements Short-term reciprocal lines of credit between the Federal Reserve and 14 foreign centeral banks as well as the Bank for International Settlements. Through a swap transactions, the Federal Reserve can, in effect, borrow foreign currency in order to purchase dollars 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 Bank of England Bank of England, central bank and note-issuing institution of Great Britain. Popularly known as the Old Lady of Threadneedle Street, its main office stands on the street of that name in London. and temporarily augmented its existing swap facility with the Bank of Canada Bank of Canada Canada's central bank, established under the Bank of Canada Act (1934). It was founded during the Great Depression to regulate credit and currency. The Bank acts as the Canadian government's fiscal agent and has the sole right to issue paper money. . The ECB drew on the swap facility on three occasions. DOLLAR DEPRECIATES THROUGH EARLY SEPTEMBER AMID INCREASED UNCERTAINTY OVER THE PROSPECTS FOR U.S. ECONOMIC RECOVERY After reaching new multiyear highs on a trade-weighted basis early in the quarter, the exchange value of the dollar declined amid increased expectations for a more protracted economic slowdown 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. and a broad retrenchment re·trench·ment n. The cutting away of superfluous tissue. from risk positions. The euro appreciated against the dollar early in the quarter, rising as high as $0.9182 on August 21, as shifting expectations for relative growth differentials between the United States and the euro area prompted investors to expand their long euro positions. The euro's initial appreciation coincided with reports of shorter-term investors having established long positions in 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. data from the Commodity Futures Trading Commission The Commodity Futures Trading Commission (CFTC), the federal regulatory agency for futures trading, was established by the Commodity Futures Trading Commission Act of 1974 (88 Stat. 1389; 7 U.S.C.A. 4a), approved October 23, 1974. (CFTC CFTC See: Commodity Futures Trading Commission CFTC See Commodity Futures Trading Commission (CFTC). ), net noncommercial long euro positions on the International Money Market futures exchange Futures Exchange Traditionally, a term referring to a central marketplace where futures contracts and options on futures contracts are traded. More recently, with the growth in electronic trading, it is also used to describe the activity of futures trading itself. rose steadily over the quarter and on August 28 reached their highest levels since the inception of the euro. However, market participants suggested that these net long euro positions may have limited the euro's gains somewhat later in the quarter, as investors were reluctant to extend positions further. The dollar also depreciated against the yen, which strengthened against a wide range of currencies. Investors bought yen to cover short positions amid expectations that funds from Japanese accounts would be repatriated from overseas investments ahead of the Japanese fiscal-half-year-end. CFTC data indicated that noncommercial accounts reported net short yen positions against the dollar through the end of July, but these positions were reversed in August. In early September, the number of net long yen positions reached its highest level in almost two years. [GRAPHICS OMITTED] U.S. economic data reported early in the quarter showed weakness in both the nonmanufacturing and manufacturing sectors, as well as an increase in the rate of unemployment, and suggested that the U.S. economic slowdown could be more prolonged. Among these data reports were the larger-than-expected declines in the U.S. nonfarm payroll data for June and August. Regional economic surveys, such as 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. released in July and the Philadelphia Business Outlook Survey released in August, also pointed to ongoing contraction in manufacturing activity. The August 8 release of the Federal Reserve's Beige Book Beige Book A commonly used name for the Fed report entitled "Summary of Commentary on Current Economic Conditions by Federal Reserve District." It is published just before the FOMC meeting on interest rates and is used to inform the members on changes in the economy since the last was interpreted by many as suggesting that weakness in the manufacturing sector had spilled over into the broader economy. Indications of a nascent stabilization in the U.S. manufacturing sector, represented by modest increases reported in the National Association of Purchasing Managers surveys for July and August, were overshadowed by ongoing concerns about U.S. corporate profitability as analysts continued to lower their earnings forecasts. Concerns about the U.S. economic outlook were mirrored in other economies as euro-area and Japanese economic data indicated further deterioration. In the euro-area countries, data showed continued declines in the manufacturing sector, particularly in Germany where factory orders fell sharply in July. Data released in August indicated the slowing pace of economic activity, as second-quarter data for German GDP GDP (guanosine diphosphate): see guanine. were flat and showed the lowest year-on-year growth rate since 1998. In Japan, economic growth was negative in the second quarter as 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 business investment remained stagnant. In this environment, many central banks This is a list of central banks. Contents A B C D E F G H I J K L M N O P Q R S T U V W Y Z eased monetary policy; from the beginning of the quarter through early September, the Federal Reserve, the ECB, and the Reserve Bank of Australia The Reserve Bank of Australia came into being on 14 January 1960 to operate as Australia's central bank and banknote issuing authority. The bank offers banking services to the Federal Government, and to licensed banks that participate in the payments system. each lowered their policy rates 25 basis points. The Bank of Canada lowered its policy rate 50 basis points. Implied yields on global interest rate futures contracts Interest rate futures contract A futures contract based on an interbank deposit rate or an underlying debt security. The value of the contract rises and falls inversely to changes in interest rates. fell in response to the policy rate cuts by central banks and the heightened expectations of additional easing. Over this period, interest rate differentials between the United States and the euro area narrowed. The sharpest declines in U.S.-euro area swap spreads occurred in the short end of the curve, with the two-year U.S. 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. falling below the two-year euro-area swap rate for the first time since the inception of the euro. [GRAPHIC OMITTED] Increased expectations for slowing global growth prompted investors to pull back from higher-risk assets. Global equity indexes and prices on corporate debt declined broadly amid increasing pessimism about corporate profitability worldwide. These factors, as well as the rate cuts by central banks, contributed to declines in short-dated sovereign debt yields and to the steepening of sovereign yield curves as investors shifted from nongovernment, fixed-income securities Fixed-income securities Investments that have specific interest rates, such as bonds. and equities into safer, more liquid assets Cash, or property immediately convertible to cash, such as Securities, notes, life insurance policies with cash surrender values, U.S. savings bonds, or an account receivable. . Developments in Latin America Latin America, the Spanish-speaking, Portuguese-speaking, and French-speaking countries (except Canada) of North America, South America, Central America, and the West Indies. may also have contributed to heightened 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. early in the quarter as investors expressed ongoing concern about the ability of Argentina to meet its debt-servicing obligations. The Emerging Markets Bond Index Plus (EMBI EMBI Emerging Markets Bond Index EMBI Emergency Management for Business & Industry +) sovereign spread over comparable 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. , which had already widened considerably earlier in the year, spiked higher in July. [GRAPHICS OMITTED] RISK AVERSION HEIGHTENS FURTHER AFTER SEPTEMBER 11 TERRORIST ATTACKS The September 11 terrorist attacks heightened concern about the risks to the U.S. economy, prompting further reductions in risk positions. Against this backdrop, foreign exchange trading Foreign Exchange Trading or FX Trading, clients are able to hedge against, or speculate upon, changes in the exchange rate of two currencies. For example, a speculator can long EUR/USD in foreign exchange market in order to profit from capturing the appreciation of Euro against the volumes declined, as investors were reluctant to establish new positions. Nevertheless, trading in the currency markets appeared orderly but subdued, as many New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of dealers moved their activities to local contingency sites and overseas offices in the days immediately following the attacks. In addition, 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. on Group of Three currency options spiked after the attacks but within days quickly declined, reflecting the relatively stable behavior of spot currency rates. At the same time, market participants continued to protect against the risk of dollar depreciation as one-month risk reversals showed a preference for dollar puts against the euro and the yen. Expectations for near-term interest rate cuts increased after September 11, as market participants anticipated that the short-term economic effect of the attacks on the U.S. economy would generate sizable disruptions in business activity and sharp declines in consumer confidence. In response to the increased uncertainty generated by the attacks, many central banks lowered their policy rates. On the morning of September 17, before U.S. equity markets resumed trading after four days of closure, the Federal Open Market Committee lowered 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 50 basis points. Later that day, the Bank of Canada, the ECB, and the Swiss National Bank The Swiss National Bank is a central bank, responsible for the monetary policy of Switzerland and issuing the Swiss franc banknotes. The names of the institution in the four official languages of the country are: German: also cut rates 50 basis points. The next day, the Bank of Japan lowered its discount rate 15 basis points and announced an increase in its target for current account bank reserves Bank reserves are banks' holdings of deposits in accounts with their central bank (for instance the European Central Bank or the Federal Reserve, in the later case called federal funds), plus currency that is physically held in bank vaults (vault cash). , and the Bank of England lowered its 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. rate 25 basis points. [GRAPHICS OMITTED] In contrast to the sharp price action in some other asset markets, the dollar traded within a relatively narrow range from September 11 to the end of the quarter. The dollar was little changed on balance against the euro after the attacks, despite the increased uncertainty about the U.S. economic outlook. Increased demand among global investors for the relative safety and liquidity of shorter-dated U.S. Treasury securities helped the dollar partially retrace earlier declines. The yen initially continued to appreciate against other major currencies, ahead of the Japanese fiscal-half-year-end, reaching a high of 116.38 yen per dollar on September 20. The exchange rate closed the quarter at 119.56 yen per dollar, however, after intervention activity by the Japanese monetary authorities late in the quarter aimed at weakening the yen. Japanese monetary authorities publicly confirmed sales of yen against dollars on September 17 and additional sales of yen on six subsequent occasions through the end of the quarter. [GRAPHIC OMITTED] After the September 11 attack, the shift out of higher-yielding markets into perceived safe-haven assets pressured the Australian and the New Zealand dollars 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 , which depreciated broadly, while the Swiss franc Noun 1. Swiss franc - the basic unit of money in Switzerland franc - the basic monetary unit in many countries; equal to 100 centimes centime - a fractional monetary unit of several countries: France and Algeria and Belgium and Burkina Faso and Burundi and strengthened against other major currencies. An additional factor that boosted demand for Swiss francs was position-covering, in anticipation of Swiss franc appreciation, by investors who had borrowed the currency to fund positions in higher-yielding assets. Investors' broad-based reductions in risk positions also prompted sharp declines in emerging-market and noninvestment-grade corporate debt. The EMBI+ sovereign spread over comparable U.S. Treasury securities reached its widest level in almost two years, and U.S. high-risk corporate yield spreads reached their highest levels since 1991. TEMPORARY SWAP LINES ESTABLISHED WITH OTHER CENTRAL BANKS To facilitate the functioning of financial markets and provide liquidity in U.S. dollars, the Federal Reserve approved the establishment of temporary reciprocal swap arrangements with the ECB and the Bank of England on September 12 and September 14 respectively. Additionally, on September 13, the Federal Reserve and the Bank of Canada agreed to a temporary augmentation of the swap facility already in place. Under the terms of these agreements, the ECB, the Bank of England, and the Bank of Canada would be able to draw up to $50 billion, $30 billion, and $10 billion, respectively, in exchange for local currency. These arrangements allowed the central banks to provide dollar proceeds of the swaps to be temporarily lent to local banks to facilitate the settlement of their dollar transactions. The temporary swap arrangements with the ECB and the Bank of England, as well as the augmentation with the Bank of Canada, expired after thirty days. [GRAPHICS OMITTED] The ECB drew on its swap line on September 12, 13, and 14. The net amount drawn totaled $5.4 billion on September 12, $14.1 billion on September 13, and $3.9 billion on September 14. As of September 17, the net amount outstanding fell to zero, and there was no further swap activity through the end of the quarter. The Bank of England and the Bank of Canada did not draw on their respective swap lines during the quarter. 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 the euro and yen reserve holdings totaled $15.4 billion for the Federal Reserve's System Open Market Account and $15.4 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 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 possible, these investments are split evenly between the Federal Reserve and the Treasury. A significant portion of the U.S. monetary authorities' foreign exchange reserves is invested in European and Japanese government securities held outright or under repurchase agreement. Under euro-denominated repurchase agreements, the U.S. monetary authorities accept sovereign debt backed by the full faith and credit of the following governments: Germany, Belgium, France, Italy, the Netherlands, and Spain. Foreign currency reserves are also invested in deposits at the Bank for International Settlements and in facilities at other official institutions. As of September 28, direct holdings of foreign government securities totaled $13.6 billion, split evenly between the Federal Reserve and the Treasury. Foreign government securities held under repurchase agreement totaled $2.8 billion at the end of the quarter and were also split evenly between the two authorities. Discontinuation dis·con·tin·u·a·tion n. A cessation; a discontinuance. Noun 1. discontinuation - the act of discontinuing or breaking off; an interruption (temporary or permanent) discontinuance of "Treasury and Federal Reserve Foreign Exchange Operations" in the Federal Reserve Bulletin. The quarterly report "Treasury and Federal Reserve Foreign Exchange Operations," by the Federal Reserve Bank of New York, will not be reprinted in the Federal Reserve Bulletin after the December 2001 issue. Each quarter's report is available soon after the end of the quarter on the web site of the Federal Reserve Bank of New York (www.newyorkfed.org/pihome/news/forex/), which also has the reports back to 1996. The reports for years before 1996 are available in paper copies from the Public Information Department, Federal Reserve Bank of New York, 33 Liberty Street, New York, NY 10045 (tel. 212-7205424). Other reprints will also be eliminated from the Bulletin after December 2001: the monthly report on industrial production and capacity utilization Capacity Utilization measures the rate at which a firm makes use of their capital productive capacities, such as factories and machinery. Capacity Utilization generally rises when the economy is healthy and falls when demand softens. , congressional testimony, the FOMC See Federal Open Market Committee. FOMC See Federal Open Market Committee (FOMC). minutes, and the Federal Reserve Bank of New York's annual "Domestic Open Market Operations Open Market Operations The buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system. Purchases inject money into the banking system and stimulate growth while sales of securities do the opposite. " report (the text portion of "Open Market Operations" will be reprinted in the Board's Annual Report rather than in the Bulletin). The documents are widely distributed Adj. 1. widely distributed - growing or occurring in many parts of the world; "a cosmopolitan herb"; "cosmopolitan in distribution" cosmopolitan bionomics, environmental science, ecology - the branch of biology concerned with the relations between organisms when originally published, and several sources for historical information are available.
1. Foreign currency holdings of U.S. monetary authorities based on
current exchange rates, 2001:Q3
Millions of dollars
Quarterly changes in balances,
by source
Inte-
Net rested
Balance purchases Effect of col-
Item June 29, and sales sales lected
2001 (1) (2) (3)
FEDERAL RESERVE SYSTEM
OPEN MARKET ACCOUNT
(SOMA)
Euro 6,792.0 .0 .0 87.6
Japanese yen 7,570.2 .0 .0 .6
Total 14,362.2 .0 .0 88.2
Interest receivables 67.1 ... ... ...
Total 14,429.3 .0 .0 88.2
U.S. TREASURY EXCHANGE
STABILIZATION FUND (ESF)
Euro 6,787.0 .0 .0 86.3
Japanese yen 7,570.3 .0 .0 .6
Total 14,357.3 .0 .0 86.9
Interest receivables (4) 66.4 ... ... ...
Total 14,423.7 .0 .0 86.9
Interest Balance
Item Revaluation accrual Sept. 28, 2001
(4) and other
FEDERAL RESERVE SYSTEM
OPEN MARKET ACCOUNT
(SOMA)
Euro 501.0 .0 7,380.6
Japanese yen 349.2 .0 7,920.0
Total 850.2 .0 15,300.6
Interest receivables 4.9 -6.6 65.4
Total 855.1 -6.6 15,366.0
U.S. TREASURY EXCHANGE
STABILIZATION FUND (ESF)
Euro 500.6 ... 7,373.9
Japanese yen 349.2 ... 7,920.1
Total 849.8 ... 15,294.0
Interest receivables (4) 4.9 -5.9 65.4
Total 854.7 -5.9 15,359.4
NOTE. Balances are now stated at amortized cost. Beginning balances
have been restated to conform with the new presentation. 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.
(3.) Current value change in foreign currency from interest collected
on matured investments.
(4.) Foreign currency and interest receivables are marked to market
daily at prevailing rates.
... 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,
2001:Q3
Millions of dollars
Federal U.S. Treasury
Period and item Reserve Exchange
System Open Stabilization
Market Account Fund
Valuation profits and losses on
outstanding assets and liabilities,
June 29, 2001
Euro -1,665.4 -1,881.8
Japanese yen 508.2 720.4
Total -1,157.2 -1,161.4
Realized profits and losses
from foreign currency sales,
June 29, 2001-Sept. 28, 2001
Euro .0 .0
Japanese yen .0 .0
Total .0 .0
Valuation profits and losses on
outstanding assets and liabilities,
Sept. 28, 2001
Euro 505.9 505.5
Japanese yen 349.2 349.2
Total 855.1 854.7
3. Reciprocal currency arrangements, September 28, 2001
Millions of dollars
Institution Amount of Outstanding,
facility Sept. 28, 2001
Reciprocal currency
arrangements
Bank of Canada 10,000 (1) .0
Bank of Mexico 3,000 .0
European Central Bank 50,000 (2) .0
Bank of England 30,000 (2) .0
Total 93,000 .0
Federal Reserve and U.S.
Treasury Exchange
Stabilization Fund currency
arrangements
Bank of Mexico 3,000 .0
Total 3,000 .0
(1.) Includes temporary augmentation of existing $2 billion swap
arrangement.
(2.) Temporary thirty-day swap arrangement.
4. Daily European Central Bank swap facility activity,
September 12-15, 2001
Millions of dollars
Amount
Date Drawings Repayments outstanding
Sept. 12 5.4 .0 5.4
Sept. 13 14.147 .0 19.547
Sept. 14 3.915 14.147 9.315
Sept. 15 .0 9.315 .0
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