Treasury and Federal Reserve foreign exchange operations.This quarterly report describes Treasury and System foreign exchange operations for the period from January through March 1997. It was 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 for Foreign Operations, System Open Market Account. Grace Sone sone n. A subjective unit of loudness, as perceived by a person with normal hearing, equal to the loudness of a pure tone having a frequency of 1,000 hertz at 40 decibels. was primarily responsible for preparation of the report.(1) During the first quarter of 1997, the dollar appreciated 8.8 percent against the mark and 6.9 percent against the yen, at one point reaching thirty-six-month and fifty-month highs of DM 1.7209 and [yen] 124.82 respectively. On a trade-weighted basis against other Group of Ten currencies, the dollar strengthened 7.5 percent.(2) The dollar achieved most of its gains in January, rising 6.4 percent and 4.9 percent against the mark and the yen, respectively, on growing market expectations for tighter monetary policy 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 continued steady monetary policies in Germany and Japan. U.S. economic data that were released early in the period showed signs of stronger growth, contrary to earlier expectations of moderating activity. Conversely con·verse 1 intr.v. con·versed, con·vers·ing, con·vers·es 1. To engage in a spoken exchange of thoughts, ideas, or feelings; talk. See Synonyms at speak. 2. , German data showed rising unemployment, and 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. remained focused on weakness in Japan's financial sector. During February and March the dollar's appreciation slowed, with U.S. currency gaining 2.2 percent against the mark and 1.9 percent against the yen. Comments by 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. Secretary Rubin and the statement by the Group of Seven (G-7) countries, after their meeting in Berlin were interpreted by market participants as a shift to a more neutral stance in exchange markets, given the correction in exchange rates that had occurred since the April 1995 G-7 statement.(3) Moreover, demand for marks was encouraged by somewhat stronger-than-expected German economic data releases and heightened prospects of a delayed start date for the European Monetary Union European Monetary Union An agreement by participating European Union member countries that includes protocols for the pooling of currency reserves and the introduction of a common currency. (EMU emu or emeu (both: ē`my  ), common name for a large, flightless bird of Australia, related to the cassowary and the ostrich. ). Meanwhile, the
dollar-yen exchange rate was constrained con·strain tr.v. con·strained, con·strain·ing, con·strains 1. To compel by physical, moral, or circumstantial force; oblige: felt constrained to object. See Synonyms at force. 2. at times by market expectations of Japanese capital 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. before the end of Japan's fiscal year on March 31, by concerns over the U.S. trade deficit and Japanese trade surplus, and by market caution about the possibility of intervention by the Japanese monetary authorities. The U.S. monetary authorities did not undertake any intervention operations in the foreign exchange market during the quarter. The U.S. 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. (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. ) received final repayment from Mexico of the remaining $3.5 billion balance outstanding under the medium-term swap arrangement. DOLLAR INTRADAY Intraday 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. VOLATILITY RELATIVELY 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. Although the dollar made significant gains during the first quarter, market volatility remained relatively muted mut·ed adj. 1. a. Muffled; indistinct: a muted voice. b. Mute or subdued; softened: muted colors. 2. , with the average daily trading range Trading Range The spread between the high and low prices traded during a period of time. Notes: When a stock breaks through or falls below its trading range after several days of trading in a range, it usually means there is momentum (positive or negative) building. for the dollar widening only slightly. On average, the dollar traded in a daily range of 0.9 percent against both the mark and the yen, compared with daily ranges of 0.7 percent experienced in both the previous quarter and the first quarter of 1996. 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 one-month options in dollar-mark and dollar-yen increased early in the period as the dollar moved higher. However, implied volatility tapered ta·per n. 1. A small or very slender candle. 2. A long wax-coated wick used to light candles or gas lamps. 3. A source of feeble light. 4. a. off later in the quarter as the dollar lost its upward momentum and, on net, implied volatility ended the period little changed. The probability distribution Probability distribution A function that describes all the values a random variable can take and the probability associated with each. Also called a probability function. probability distribution of future exchange rates implied by currency options prices was little changed over the quarter for dollar-mark but was slightly wider for dollar-yen. RESPONSE OF THE DOLLAR TO EXPECTATIONS OF DIVERGENT di·ver·gent adj. 1. Drawing apart from a common point; diverging. 2. Departing from convention. 3. Differing from another: a divergent opinion. 4. GROWTH In January, the dollar's upward movement reflected market perceptions of stronger U.S. economic fundamentals relative to Germany and Japan. This disparity dis·par·i·ty n. pl. dis·par·i·ties 1. The condition or fact of being unequal, as in age, rank, or degree; difference: "narrow the economic disparities among regions and industries" in growth expectations was reflected in dollar-favorable yield differentials on ten-year bonds, which widened to levels not seen since 1989. Upward revisions to fourth-quarter GDP GDP (guanosine diphosphate): see guanine. in the United States, coupled with continued reports of tightening labor markets 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 and strong retail sales, prompted market analysts to revise up growth forecasts for the first quarter and bring forward expectations for higher U.S. interest rates. Chairman Greenspan's Humphrey-Hawkins testimony on February 26, in which he spoke of possible preemptive pre·emp·tive or pre-emp·tive adj. 1. Of, relating to, or characteristic of preemption. 2. Having or granted by the right of preemption. 3. a. tightening by the Federal Reserve, heightened anticipation for a near-term interest rate hike. Implied yields on three-month forward rate agreements rose 15 basis points immediately after Chairman Greenspan's testimony. On March 25, the Federal Open Market Committee (FOMC See Federal Open Market Committee. FOMC See Federal Open Market Committee (FOMC). ) announced a 25-basis-point hike in 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 interest rate, to 5.50 percent. In contrast to the U.S. performance, fourth-quarter GDP growth for Germany was softer than expected, and the level of unemployment reached a postwar high of 4.7 million in February. These data releases underpinned market expectations that German monetary policy would remain steady and even elicited e·lic·it tr.v. e·lic·it·ed, e·lic·it·ing, e·lic·its 1. a. To bring or draw out (something latent); educe. b. To arrive at (a truth, for example) by logic. 2. some discussion of a possible interest rate cut. Also, comments made by various European officials were interpreted by market participants as implying that currency depreciation would contribute to Europe's economic recovery. Meanwhile, market participants grew cautious about financial sector risks in Japan, most notably after Moody's moved the outlook of four major Japanese banks to negative from stable. Japanese equity markets weakened, with the Nikkei -225 stock index falling 7.0 percent and the Tokyo Price Index (Topix) ending the quarter down 6.6 percent. The decline in the Topix was led by banking and brokerage shares that were down 17 percent and 19 percent respectively. Weakness in Japan's financial sector and expectations of fiscal contraction following the April 1 consumption tax hike reinforced market expectations that Japan would maintain an accommodative monetary policy Accommodative monetary policy Federal Reserve System policy to increase the amount of money available to banks for lending. See: Monetary policy. accommodative monetary policy , and Japanese government bonds rallied. The benchmark ten-year bond yield fell to an intraperiod low of 2.20 percent. FIRMING OF THE MARK LATER IN PERIOD In February, reports of slightly stronger-than-expected economic data in Germany--including surveys of business sentiment, M3 money supply growth, and wholesale prices--encouraged demand for marks. Renewed doubt about a timely start for EMU also supported mark buying. Any 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. expectations for lower German interest rates dissipated dis·si·pat·ed adj. 1. Intemperate in the pursuit of pleasure; dissolute. 2. Wasted or squandered. 3. Irreversibly lost. Used of energy. , and interest rates implied by three-month forward rate agreements rose in the second half of the quarter. Meanwhile, prices of one-month 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. for dollar-mark continued to favor dollar call options, reflecting a higher cost for insurance against a significant dollar appreciation against the mark.(4) INFLUENCE OF JAPANESE CAPITAL REPATRIATION AND CONCERNS OVER THE US. TRADE IMBALANCE ON DOLLAR-YEN In mid-February, expectations of Japanese capital repatriation ahead of Japan's fiscal year ending on March 31 led to purchases of yen against a broad range of currencies. The dollar moved lower against the yen, testing [yen] 120, and prices of one-month dollar-yen risk reversals shifted to favor dollar put options, indicating an increase in the cost for insurance against a significant dollar depreciation. Subsequently, however, the dollar moved off its lows, and one-month risk reversal prices moved closer to neutral as market concerns over Japanese capital repatriation moderated. Toward the end of the quarter, the re-emergence of a potential for U.S.-Japan trade tensions made market participants reluctant to extend long dollar positions. U.S. and Japanese trade data released after mid-March showed a widening of the U.S. trade deficit and a slowing in the rate of decline in the Japanese trade surplus. In addition, the performance of the Japanese export sector and comments from Japanese officials raised some expectations for a strong Tankan survey Tankan Survey An economic survey of Japanese business issued by the central Bank of Japan, which it then uses to formulate monetary policy. The report is released four times a year in April, July, October and mid-December. to be released in early April. MEXICAN SWAP ACTIVITY On January 16, Mexico made a final repayment of $3.5 billion on its drawings on medium-term 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 ESF. With this repayment, the medium-term swap arrangement terminated. 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 this quarter. At the end of the quarter, the current values of the German 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 of the Federal Reserve System and the ESF were $17.9 billion and $14.6 billion respectively. The U.S. monetary authorities invest all 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. A significant portion of these balances is invested in German and Japanese government securities held either 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. . As of March 31, outright holdings of government securities by U.S. monetary authorities totaled $7.0 billion. Japanese and German government securities held under repurchase agreement are arranged either through transactions executed directly in the market or through agreements with official institutions. Government securities held under repurchase agreements by the U.S. monetary authorities totaled $11.1 billion at the end of the quarter. Foreign currency reserves are also invested in deposits at the Bank for International Settlements and in facilities at other official institutions. 1. Foreign exchange holdings of U.S. monetary authorities based on current exchange rates, 1997:Q1 Millions of dollars
Quarterly
changes in
balances
by source
Balance,
Item Dec. 31, 1996 Net purchases
and sales(1)
FEDERAL RESERVE
Deutsche marks 13,030.1 .0
Japanese yen 6,152.7 .0
Interest receivables(4) 81.7 ...
Other cash flow from investments(5) -1.0 ...
Total 19,263.5 ...
U.S. TREASURY
EXCHANGE STABILIZATION FUND
Deutsche marks 6,594.6 .0
Japanese yen 9,023.6 .0
Mexican pesos(6) 3,500.0 -3,511.9
Interest receivables(4) 49.6 ...
Other cash flow from investments(4) -6.2 ...
Total 19,161.7 ...
Item Impact of Investment
sales(2) income
FEDERAL RESERVE
Deutsche marks .0 93.3
Japanese yen .0 4.8
Interest receivables(4) ... ...
Other cash flow from investments(5) ... ...
Total ... ...
U.S. TREASURY
EXCHANGE STABILIZATION FUND
Deutsche marks .0 47.6
Japanese yen .0 7.1
Mexican pesos(6) .0 11.9
Interest receivables(4) ... ...
Other cash flow from investments(4) ... ...
Total ... ...
Item Currency Balance,
vacation Mar. 31,
adjustments(3) 1997
FEDERAL RESERVE
Deutsche marks -1,009.6 12,113.8
Japanese yen -396.0 5,761.5
Interest receivables(4) ... 76.4
Other cash flow from investments(5) ... -1.6
Total ... 17,950.1
U.S. TREASURY
EXCHANGE STABILIZATION FUND
Deutsche marks -510.9 6,131.3
Japanese yen -585.3 8,445.4
Mexican pesos(6) .0(7) .0
Interest receivables(4) ... 40.0
Other cash flow from investments(4) ... -3.8
Total ... 14,612.9
NOTE. Figures may not sum to totals because of rounding. (1.) Purchases and sales include foreign currency sales and purchases related to official activity, swap drawings and repayments, and warehousing. (2.) Calculated using marked-to-market exchange rates; 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 historic cost-of-acquisition exchange rate and the sale exchange rate are shown 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. (5.) Cash flow differences from payment and collection of funds between quarters. (6.) See table 4 for a breakdown of Mexican swap activities. Note that the investment income on Mexican swaps is sold back to the Bank of Mexico The Bank of Mexico (Spanish: Banco de México), abbreviated BdeM or Banxico, is Mexico's central bank and lender of last resort. Banco de México is autonomous in exercising its functions. . (7.) Valuation adjustments on peso balances do not affect profit and loss because the effect is offset by the unwinding of the forward contract at the repayment date. Although the ESF does not mark to market its peso holdings, Mexico is obligated ob·li·gate tr.v. ob·li·gat·ed, ob·li·gat·ing, ob·li·gates 1. To bind, compel, or constrain by a social, legal, or moral tie. See Synonyms at force. 2. To cause to be grateful or indebted; oblige. to maintain in dollar terms the value of ESF peso holdings resulting from Mexican drawings under the Medium-Term Stabilization Stabilization The action undertakes a country when it buys and sells its own currency to protect its exchange value. Actions registered competitive traders undertake by on the NYSE to meet the exchange requirement that 75% of their traded be stabilizing, meaning that sell orders Agreement. 2. Net profits or losses (-) on U.S. Treasury and Federal Reserve foreign exchange operations based on historical cost-of-acquisition exchange rates, 1997:Q1 Millions of dollars
U.S. Treasury
Exchange
Federal Stabilization
Period and item Reserve Fund
Valuation profits and losses on
outstanding assets and liabilities,
Dec. 31, 1996
Deutsche marks 1,965.9 586.1
Japanese yen 984.5 1,450.8
Total 2,950.4 2,036.9
Realized profits and losses
from foreign currency sales,
Dec. 31, 1996-Mar. 31, 1997
Deutsche marks .0 .0
Japanese yen .0 .0
Total .0 .0
Valuation profits and losses on
outstanding assets and liabilities,
Mar. 31, 1997(1)
Deutsche marks 956.3 75.2
Japanese yen 589.6 871.7
Total 1,545.9 946.9
NOTE. Figures may not sum to totals because of rounding. (1.) Valuation profits or losses are not affected by peso holding, which are canceled by forward contracts. 3. Currency arrangements, March 31, 1997 Millions of dollars
Amount of Outstanding,
Institution facility Mar. 31, 1997
Federal Reserve
Reciprocal Currency
Arrangements
Austrian National Bank 250 0
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 3,000
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 32,400 0
U.S. Treasury
Exchange Stabilization Fund
Currency Arrangements
Deutsche Bundesbank 1,000 0
Bank of Mexico 3,000 0
United Mexican States ... 0
Total ... 0
4. Drawing/rollovers and repayments (-) by Mexican monetary authorities, 1997:Q1 Millions of dollars Currency arrangements Outstanding with the U.S. Treasury Dec. 31, Exchange Stabilization Fund 1996 Jan. Feb. Mar. Bank of Mexico Regular 0 0 0 0 Medium-term 3,500 -3,500 0 0 Currency arrangements Outstanding with the U.S. Treasury Mar. 31, Exchange Stabilization Fund 1997 Bank of Mexico Regular 0 Medium-term 0 NOTE. Data are on a value-date basis. (1.) The charts for the report are available on request from Publications Services, Mail Stop 127, Board of Governors of the Federal Reserve System Board of Governors of the Federal Reserve System The managing body of the Federal Reserve System, which sets policies on bank practices and the money supply. , Washington, DC 20551. (2.) The dollar's movements on a trade-weighted basis against ten major currencies are measured using an index developed by members of the staff of the Board of Governors of the Federal Reserve System. (3.) On February 7, Secretary Rubin stated, "As we have said many times, a strong dollar is in the United States' interest. We have had a strong dollar for some time now." Following the G-7 meeting on February 8, the G-7 press guidance stated, "We believe that major misalignments in exchange markets noted in our April 1995 communique have been corrected. We reaffirmed our views that exchange rates should reflect economic fundamentals and that excess volatility is undesirable." (4.) A risk reversal is an option position consisting of a written put and a purchased call that mature on the same date and are equally out of the money. The price of a risk reversal indicates whether the dollar call or the dollar put is more valuable. If the dollar call is at a premium, the market is willing to pay more to insure against the risk that the dollar will rise sharply. If the dollar put is at a premium, the market is willing to pay more to insure against the risk that the dollar will fall sharply. |
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