Treasury and Federal Reserve foreign exchange operations.This quarterly report describes 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. and System foreign exchange operations for the period from October through December 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, System Open Market Account. Andrew Jewell was primarily responsible for preparation of the report. In a period marked by dramatic developments in Asia, the dollar appreciated 8.3 percent against the 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. and 2.2 percent against the German mark. On a trade-weighted basis against Group of Ten (G-10) currencies, the dollar appreciated 2.7 percent.(1) Against the yen, the dollar rose to its highest levels since 1992 as market participants reacted to an increasingly pessimistic economic outlook in Japan, concern over the health of the Japanese financial sector The Japanese financial sector is one of the largest in the world, and it is home to some of the largest financial services companies, business groups and banks. The large keiretsus (business groups), the multinational companies such as Sony, Sumitomo, Mitsubishi, Toyota own billion , and spreading volatility in Asian financial markets. Against the mark, the dollar initially weakened, pressured by the effect of Asian volatility on markets in North and South America South America, fourth largest continent (1991 est. pop. 299,150,000), c.6,880,000 sq mi (17,819,000 sq km), the southern of the two continents of the Western Hemisphere. . However, the dollar later recovered amid a growing perception that European economies were more exposed to events in Asia than previously thought and as market participants scaled back expectations of further monetary tightening in Germany. The U.S. monetary authorities did not intervene in the foreign exchange markets during the quarter. A FALL OF THE DOLLAR'S AVERAGE 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. 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. FROM THIRD-QUARTER LEVELS AND A RISE IN 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. The dollar's average intraday trading range against the yen fell in the fourth quarter of 1997 to 1.0 percent from 1. 1 percent in the third quarter but was higher than the 0.7 percent range in the fourth quarter of 1996. The dollar's average intraday trading range against the mark fell to 0.9 percent in the fourth quarter from 1.1 percent in the previous quarter, but was higher than the 0.7 percent range in the fourth quarter of 1996. The combined average intraday trading range against both the yen and the mark fell to 0.9 percent from 1.1 percent in the previous quarter, marking the first decline since the third quarter of 1996. Implied volatility moved higher, reflecting expectations for potentially large dollar moves. One-month dollar-yen implied volatility peaked at more than 14 percent in December, approaching highs for the year, as the dollar appreciated to its strongest levels in more than five years against the yen. One-month dollar-mark implied volatility rose more than 12 percent in late October after sharp losses in the dollar's value against the mark but later returned to levels of less than 10 percent as the dollar recovered. DEVELOPMENTS IN ASIA Movements in the U.S. dollar were influenced throughout the period by disruptions in Asian markets. Currency market turmoil in Southeast Asia Southeast Asia, region of Asia (1990 est. pop. 442,500,000), c.1,740,000 sq mi (4,506,600 sq km), bounded roughly by the Indian subcontinent on the west, China on the north, and the Pacific Ocean on the east. continued, with the Thai baht “Tical” redirects here. For the album, see Tical (album). The baht (Thai: บาท, symbol ฿, ISO 4217 code THB) is the currency of Thailand. , the Indonesian rupiah The rupiah (Rp) is the official currency of Indonesia. Issued and controlled by the Bank of Indonesia, the ISO 4217 currency code for the Indonesian rupiah is IDR. The symbol used on all banknotes and coins are Rp. The name derives from the Indian monetary unit rupee. , the Philippine peso Noun 1. Philippine peso - the basic unit of money in the Philippines; equal to 100 centavos peso centavo - a fractional monetary unit of several countries: El Salvador and Sao Tome and Principe and Brazil and Argentina and Bolivia and Colombia and Cuba and , the Malaysian ringgit The ringgit (unofficially known as the Malaysian dollar), is the currency of Malaysia. It is divided into 100 sen (cents) and its currency code is MYR (Malaysian Ringgit). , and the Singapore dollar reaching historic lows against the U.S. dollar. In late October, focus shifted northward to the sustainability of the Hong Kong dollar Noun 1. Hong Kong dollar - the basic unit of money in Hong Kong dollar - the basic monetary unit in many countries; equal to 100 cents peg after the decision by monetary authorities in Taiwan to allow the new Taiwan dollar The New Taiwan dollar (Traditional Chinese: 新臺幣 or 新台幣; Pinyin: Xīntáibì) (currency code TWD and common abbreviation NT$), or simply to depreciate depreciate v. in accounting, to reduce the value of an asset each year theoretically on the basis that the assets (such as equipment, vehicles or structures) will eventually become obsolete, worn out and of little value. (See: depreciation) . In response to mounting pressure on the Hong Kong dollar, the Hong Kong Monetary Authority The Hong Kong Monetary Authority (Traditional Chinese: 香港金融管理局) or HKMA (金管局) is Hong Kong's central banking institution. pushed interest rates higher. With overnight rates trading as high as 150 percent and the one-month Hong Kong Hong Kong (hŏng kŏng), Mandarin Xianggang, special administrative region of China, formerly a British crown colony (2005 est. pop. 6,899,000), land area 422 sq mi (1,092 sq km), adjacent to Guangdong prov. interbank in·ter·bank adj. Relating to, involving, or connecting two or more banks: interbank borrowing; an interbank network of automated teller machines. offered rate rising to 47.5 percent on October 23, the Hong Kong dollar strengthened from HKD HKD In currencies, this is the abbreviation for the Hong Kong Dollar. Notes: The currency market, also known as the Foreign Exchange market, is the largest financial market in the world, with a daily average volume of over US $1 trillion. 7.75 to HKD 7.71 against the U.S. dollar, then stabilized in later weeks around the HKD 7.73 level. Higher interest rates, however, pressured stock prices and property values lower. On October 23, the benchmark Hang Seng index Hang Seng index The major index in Hong Kong. Hang Seng Index A market-weighted index of 33 stocks making up approximately 70% of the market value of all stocks traded on the Stock Exchange of Hong Kong. fell 10.4 percent, followed by a 13.7 percent decline on October 28. Sharp losses in Hong Kong's stock market triggered abrupt reversals in equity markets across Asia, Europe, and the Americas. Benchmark stock indexes in Japan, Germany, Mexico, and 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. fell 9.0, 9.7, 12.7, and 6.3 percent, respectively, in October, including a 7.2 percent drop in the Dow Jones Industrial Average Dow Jones Industrial Average The best known U.S. index of stocks. A price-weighted average of 30 actively traded blue-chip stocks, primarily industrials including stocks that trade on the New York Stock Exchange. on October 27. Stock markets in the United States, Mexico, and Europe later recovered to end the quarter little changed, while stocks in much of Asia remained under pressure. As global equity markets declined, credit spreads in fixed-income markets widened to reflect increased risk premiums. Yield spreads of dollar-denominated Asian debt issues over U.S. Treasuries reached record highs, with spreads of Thai and Indonesian sovereign debt widening more than 300 basis points and the spread of the benchmark Korean Development Bank issue widening more than 700 basis points. Similarly, heightened focus on risk premiums in emerging markets contributed to a substantial widening of yield spreads of Latin American and Eastern European Brady bonds Brady Bonds Bonds that are issued by the governments of developing countries. Brady Bonds are some of the most liquid emerging market securities. They are named after former U.S. over Treasuries. In the United States, strong demand for U.S. Treasuries pushed down interest rates, with the yield on the benchmark thirty-year bond failing 48 basis points to end the year at 5.92 percent. As the period progressed, the focus in Asia shifted to deteriorating economic and financial conditions in Korea. The Korean won
The Bank of Korea, the central bank of the Republic of Korea (South Korea) was established on June 12, 1950 under the Bank of Korea announced it would stop intervening to support the won, a decision thought to be prompted by declining levels of foreign currency reserves. Faced with a growing number of corporate failures, continued declines in its equity and currency markets, and an increasing risk that Korean banks and corporations would not be able to meet maturing foreign currency obligations, the Korean government announced on November 22 that it was seeking funds from the International Monetary Fund (IMF IMF See: International Monetary Fund IMF See International Monetary Fund (IMF). ). Despite agreement on an IMF-led loan package on December 3, pressure on Korean markets continued into year-end as estimates of the country's short-term external debt increased. By late December, the won had depreciated Depreciated may refer to:
2. and leading to meetings among international creditors to discuss rolling over Korean short-term debt Short-term debt Debt obligations, recorded as current liabilities, requiring payment within the year. obligations. Korean stocks ended the quarter down 41.8 percent. RESPONSE OF THE DOLLAR TO DEEPENING PESSIMISM IN JAPAN During October the dollar traded in a relatively narrow 120-122 [yen] range against the yen despite continued signs of weakness in the Japanese economy and volatility in Southeast Asia. The September 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. of business sentiment, released on October 1, recorded the first erosion in sentiment among large manufacturers since August 1996. Gains in the dollar, however, were restrained by discussion of possible fiscal stimulus measures to encourage economic growth in Japan and by market participants' concerns that a higher dollar would lead to U.S.-Japan trade frictions. Subsequent measures proposed by the Japanese government did little to alter increasingly negative market sentiment Market Sentiment The feeling or tone of a market (i.e. crowd psychology). It is shown by the activity and price movement of the securities. Notes: For example, rising prices would indicate a bullish market sentiment. toward Japan's economic outlook. Japanese bond yields resumed their decline, and reached new record lows in late October. On November 14, the Nikkei broke below 15,000 for the first time in more than two years, and the dollar rose to 125.40 [yen]. Problems in Japan's financial sector further undermined sentiment. The closings of Sanyo Securities, Hokkaido Takushoku Bank The Hokkaidō Takushoku Bank, Ltd. (北海道拓殖銀行 , and Yamaichi Securities Yamaichi Securities Co., Ltd. (山一證券株式会社 in November prompted concerns about the health of other Japanese financial institutions burdened with bad loans and possible unreported losses. Such concerns led to an increase in the premium paid by Japanese banks for dollar funding compared with non-Japanese institutions. In early December, some Japanese banks were required to pay a premium of more than 100 basis points to borrow one-month funds, compared with a premium of about 30 basis points in the fourth quarter of 1996. Although funding pressures eased later in the month, the premium paid by Japanese banks remained above levels paid in previous years, reflecting continued credit concerns. In addition, short-term money market rates in Japan rose rapidly, suggesting yen funding pressures. Late in the period, the bankruptcy of a large Japanese food trading company was viewed as an indication that reduced access to credit had extended beyond the financial sector. In these circumstances, the Bank of Japan adopted a more accommodative stance in its monetary policy operations and reinstated its collateralized lending facility, while discussion grew within the Japanese government regarding the use of public funds See Fund, 3. See also: Public to support the financial system and protect depositors. Meanwhile, the deteriorating situation in Korea, coupled with continued weakness in Southeast Asian markets, cast further doubts on Japan's prospects for near-term recovery. The December Tankan survey indicated that business sentiment had deteriorated beyond consensus expectations, and the following week the Bank of Japan, in its monthly economic review, acknowledged that Japan's economic growth had stalled. In this environment, the dollar continued its steady appreciation, reaching as high as 131.25 [yen] on December 15, its strongest level against the yen in more than five years. After the announcement of a one-time 2 [yen] trillion personal-income-tax cut and other stimulus measures on December 17, the dollar fell below 126 [yen] as Japanese Finance Minister Mitsuzuka confirmed reports of Japanese intervention to buy yen. However, the yen's strength was shortlived, and the dollar closed the year at 130.35 [yen]. RECOVERY OF DOLLAR FROM INITIAL WEAKNESS AGAINST THE MARK Against the mark, the dollar traded in a broad DM 1.70-1.80 range, posting declines early in the period but appreciating throughout most of November and December to end the quarter modestly higher. Expectations of rising German interest rates contributed to the dollar's downward bias against the mark in October, with the Bundesbank's decision to raise interest rates 30 basis points on October 9 widely viewed as the first in a series of rate hikes in Germany and other core European countries ahead of the European Economic and Monetary Union (EMU). The dollar's steepest declines against the mark occurred later in the month and in early November after sharp losses in U.S. equities, as market participants considered the spillover spill·o·ver n. 1. The act or an instance of spilling over. 2. An amount or quantity spilled over. 3. A side effect arising from or as if from an unpredicted source: effects of Asia on markets in the United States and 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. . Initially, Germany and other European countries were perceived to be better insulated from Asia than the United States--a factor that lent further support to the mark. The dollar's appreciation later in the period followed a return to relative stability in U.S. and Latin American markets and an unwinding of expectations for an accelerated timetable of interest rate hikes in Europe. On November 14, Bundesbank President Tietmeyer, in comments echoed by other European officials, noted that 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, leaders had come to an understanding that interest rates among the core nations would be oriented toward the lowest rates and not the average of all EMU participants. Such statements, combined with benign German inflationary data and a growing perception that European economies were also vulnerable to weakness in Asia, led market participants to scale back expectations of higher German interest rates into 1998. The implied yield on June 1998 Euromark futures contracts, which rose to a high of 4.55 percent on October 22, ended the period at 3.93 percent. The spread between ten-year U.S. and German government bond yields widened in the dollar's favor to a high of 58 basis points from an intraperiod low of 12 basis points on October 27. 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 this quarter. At the end of the quarter, the current values of the German mark and Japanese yen reserve holdings totaled $17.0 billion for the Federal Reserve System and $13.8 billion for the 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. A significant portion of these 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. . As of December 31, outright holdings of government securities by U.S. monetary authorities totaled $6.8 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 $10.9 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. [Figures 1-8 ILLUSTRATION OMITTED] 1. Foreign exchange holdings of U.S. monetary authorities based on current exchange rates. 1997:Q4
Millions of dollars
Quarterly changes in balances by source
Item Balance,
Sept. 30, 1997 Net purchases Impact of
and sales(1) sales(2)
FEDERAL RESERVE
Deutsche marks 11,609.5 .0 .0
Japanese yen 5,908.9 .0 .0
Interest
receivables(4) 73.5 ... ...
Other cash flow
from investments(5) .2 ... ...
Total 17,592.1 ... ...
US. TREASURY
EXCHANGE
STABILIZATION FUND
Deutsche marks 5,877.3 .0 .0
Japanese yen 8,662.5 .0 .0
Interest
receivables(4) 37.6 ... ...
Other cash flow
from investments(5) .5 ... ...
Total 14,577.9 ... ...
Item Currency
Investment valuation
income adjustments(3)
FEDERAL RESERVE
Deutsche marks 85.7 -208.5
Japanese yen 5.8 -441.3
Interest
receivables(4) ... ...
Other cash flow
from investments(5) ... ...
Total 91.5 -649.8
US. TREASURY
EXCHANGE
STABILIZATION FUND
Deutsche marks 43.8 -105.5
Japanese yen 8.8 -646.7
Interest
receivables(4) ... ...
Other cash flow
from investments(5) ... ...
Total 52.6 -752.2
Item Balance,
Interest accrual Dec. 31, 1997
(net) and other
FEDERAL RESERVE
Deutsche marks .0 11,486.7
Japanese yen .0 5,473.4
Interest
receivables(4) 9.4 82.9
Other cash flow
from investments(5) 3.0 3.2
Total 12.4 17,046.2
US. TREASURY
EXCHANGE
STABILIZATION FUND
Deutsche marks .0 5,815.6
Japanese yen .0 8,024.6
Interest
receivables(4) .9 38.5
Other cash flow
from investments(5) 5.4 5.9
Total 6.3 13,884.6
(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 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 (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. 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. 2. Net profits or losses (-) on U.S. Treasury and Federal Reserve Foreign exchange operations based on historical cost-of-acquisition exchange rates, 1997:Q4
Millions of dollars
US. Treasury
Period and item Federal Exchange
Reserve Stabilization
Fund
Valuation profits and losses on
outstanding assets and liabilities,
Sept. 30, 1997
Deutsche marks 274.8 -269.1
Japanese yen 732.9 1,081.8
Total 1,007.7 812.0
Realized profits and losses
from foreign currency sales,
Sept. 30-Dec. 31, 1997
Deutsche marks .0 .0
Japanese yen .0 .0
Total .0 .0
Valuation profits and losses on
outstanding assets and liabilities,
Dec. 31, 1997
Deutsche marks 66.3 -375.3
Japanese yen 291.5 434.6
Total 357.8 59.3
3. Currency arrangements. December 31, 1997
Millions of dollars
Institution Amount of Outstanding,
facility Dec. 31, 1997
Federal Reserve
Reciprocal Currency
Arrangements
Austrian National Bank 250 0
National Bank of Belgium 1,000 0
Bank of Canada 2,000 0
National Bank of Denmark 250 0
Bank of England 3,000 0
Bank of France 2,000 0
Deutsche Bundesbank 6,000 0
Bank of Italy 3,000 0
Bank of Japan 5,000 0
Bank of Mexico 3,000 0
Netherlands Bank 500 0
Bank of Norway 250 0
Bank of Sweden 300 0
Swiss National Bank 4,000 0
Bank for International Settlements
Dollars against Swiss francs 600 0
Dollars against other authorized
European currencies 1,250 0
Total 32,400 0
U.S. Treasury
Exchange Stabilization Fund
Currency Arrangements
Deutsche Bundesbank 1,000 0
Bank of Mexico 3,000 0
Total ... 0
(1.) The dollar's movements on a trade-weighted basis against ten major currencies are measured using an index developed by staff members of the 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. . |
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