Treasury and Federal Reserve foreign exchange operations.This quarterly report describes Treasury and System foreign exchange operations for the period from October through December 1996. 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. Richard Dzina was primarily responsible for preparation of the report.(1) During the quarter the dollar appreciated 3.9 percent against the yen and 0.9 percent against the mark, at one point establishing forty-five-month and twenty-four-month highs of [yen] 116.40 and DM 1.5665 respectively. On a trade-weighted basis against the currencies of the other Group of Ten countries, the dollar appreciated 0.2 percent. The dollar strengthened despite a shift in market expectations during the quarter from anticipation of a near-term tightening of U.S. monetary policy to the view that the Federal Open Market Committee (FOMC See Federal Open Market Committee. FOMC See Federal Open Market Committee (FOMC). ) would not take any action through the end of the year. Against the yen, the dollar was supported by perceptions of substantial Japanese capital outflows Capital outflow is an economic term describing capital flowing out of (or leaving) a particular economy. Outflowing capital can be caused by any number of economic or political reasons but can often originate from instability in either sphere. , as economic data and concerns about the Japanese financial system The main elements of Japan's financial system is much the same as those of other major industrialized nations: a commercial banking system, which accepted deposits, extended loans to businesses, and dealt in foreign exchange; specialized government-owned financial institutions, reaffirmed expectations that Japanese monetary policy would remain unchanged. After trading slightly weaker against the mark early in the period, the dollar appreciated against the German currency after calls from several European officials welcoming further depreciation of their currencies. Also, general optimism about 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. ) process prompted flows out of marks into other European
currencies. The U.S. monetary authorities did not undertake any
intervention operations during the quarter.GENERAL STABILITY OF EXCHANGE RATES The relative stability that characterized foreign exchange markets through the first three quarters of 1996 continued during the period. Although 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 increased slightly from the previous quarter, it remained substantially less than the range observed for the same period in 1995. On average, the dollar traded in a daily range of 0.7 percent against both the mark and the yen. This compares with daily ranges of 0.6 percent against both currencies in the previous period and with daily ranges of 1 percent against the mark and 1.1 percent against the yen for the fourth quarter of 1995. Despite a few brief periods of sharp movements, the dollar generally firmed in a moderate manner throughout the period. Nevertheless, 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 dollar-mark and dollar-yen one-month options increased during the quarter. 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 became notably wider, possibly a reflection of some concern about the variability of the future spot rate. A SHIFT OF EXPECTATIONS FOR U.S. MONETARY POLICY TO NEUTRAL In September the decision of the FOMC to leave rates unchanged, followed by evidence of an economic slowdown and benign inflationary in·fla·tion·ar·y adj. Of, associated with, or tending to cause inflation: inflationary prices; inflationary policies. Adj. 1. pressures, shifted expectations for U.S. monetary policy from near-certain tightening in late 1996 to a widespread consensus that the Committee would not take any action by year-end. At certain points during the quarter, the weaker data even spawned tentative discussions of the prospect of easing. Despite the shift in market expectations and the corresponding downward trend in U.S. forward rates, the dollar appreciated during the period as non-U.S. factors appeared to dominate currency trading. DEPRECIATION OF THE YEN AMID PERCEPTIONS OF JAPANESE CAPITAL OUTFLOWS Japanese economic data, as well as the failure of several financial institutions, suggested that the pace of economic recovery in Japan had not accelerated and bolstered market expectations that a near-term tightening of Japanese monetary policy was unlikely. The anticipation of fiscal contraction in 1997 and weakness in the Nikkei stock index helped solidify 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. this view. The yen weakened substantially in this environment, not only against the dollar but also on a tradeweighted basis as ongoing reports of capital outflows from Japanese investors seeking higher yields overseas pressured the currency. In October and November net capital outflows Net Capital Outflow (NCO) is one of two major methods of determining the nature of a country's foreign trade (the other being the current account balance). NCO is the quantity of foreign assets held by residents of a given country minus the quantity of domestic assets in that from Japan exceeded 1 trillion yen each month. Reportedly contributing to the capital outflow was the reallocation Noun 1. reallocation - a share that has been allocated again allocation, allotment - a share set aside for a specific purpose 2. reallocation of additional funds from domestic to international portfolios with the start of the Japanese fiscal half-year on October 1. As the yen continued to weaken, 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. began to speculate about the degree of official tolerance for additional depreciation of the Japanese currency. On November 7, comments by Japanese officials suggested that Japanese economic weakness was overstated o·ver·state tr.v. o·ver·stat·ed, o·ver·stat·ing, o·ver·states To state in exaggerated terms. See Synonyms at exaggerate. o and that the yen was unlikely to weaken further. After having strengthened more than [yen] 114 earlier in the quarter, the dollar retraced Retraced is a Jake E. Lee solo album. Track listing
U.S. and Japanese trade data during the period suggested that the pace of adjustment in the Japanese external imbalance might be slowing and focused attention on the rising dollar as a potential trade issue. Nevertheless, trade data released during the period had little lasting effect on currency trading, and expectations of Japanese capital outflows dominated market psychology. THE DOLLAR'S NEW 1996 HIGH AGAINST THE MARK Against the mark, the dollar weakened slightly early in the period amid open debates over the terms of the economic stability pact Stability Pact can mean
The dollar began a rapid appreciation midway through the period, however. In nine consecutive trading sessions between November 21 and December 4, the dollar strengthened from just below DM 1.50 to more than DM 1.56, with each closing rate exceeding that of the previous day. The dollar appreciation coincided with more favorable fa·vor·a·ble adj. 1. Advantageous; helpful: favorable winds. 2. Encouraging; propitious: a favorable diagnosis. 3. EMU sentiment after the Italian lira's re-entry RE-ENTRY, estates. The resuming or retaking possession of land which the party lately had. 2. Ground rent deeds and leases frequently contain a clause authorizing the landlord to reenter on the non-payment of rent, or the breach of some covenant, when the to the European Exchange Rate Mechanism European exchange rate mechanism (ERM) The system that countries in the European Union once used to pay exchange rates within bands around an ERM central value. and after indications that a stability pact would be negotiated at the Dublin summit. In addition, the dollar benefited from a brief reconsideration of prospects for further easing in Germany and the perception that the monetary authorities of continental Europe Continental Europe, also referred to as mainland Europe or simply the Continent, is the continent of Europe, explicitly excluding European islands and, at times, peninsulas. would welcome further depreciation of their currencies. In the first two weeks of December, equity, fixed income, and currency markets became more volatile as market participants closed out positions before year-end. Nevertheless, previously established themes, particularly with respect to expectations for continued Japanese capital outflows, dominated holiday-thinned currency trading, and the dollar continued to appreciate as the year-end approached. 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 foreign currency reserve holdings of the Federal Reserve System and 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. (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. ) were valued at $19.2 billion and $15.6 billion, respectively, and consisted of German marks 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. . 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 December 31, outright holdings of government securities by U.S. monetary authorities totaled $7.7 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 $10.5 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. [TABULAR tab·u·lar adj. 1. Having a plane surface; flat. 2. Organized as a table or list. 3. Calculated by means of a table. tabular resembling a table. DATA 3 NOT REPRODUCIBLE IN ASCII ASCII or American Standard Code for Information Interchange, a set of codes used to represent letters, numbers, a few symbols, and control characters. Originally designed for teletype operations, it has found wide application in computers. ] 1. Foreign exchange holdings of U.S. monetary authorities based on current exchange rates, 1996:Q4
Millions of dollars
Balance,
Item Sept. 30, 1996
FEDERAL RESERVE
Deutsche marks 13,038.9
Japanese yen 6,376.8
Interest receivables(4) 72.0
Other cash flow from investments(5) -3.5
Total 19,484.2
U.S. TREASURY EXCHANGE
STABILIZATION FUND
Deutsche marks 6,598.8
Japanese yen 9,348.5
Mexican pesos(6) 3,500.0
Interest receivables(4) 39.1
Other cash flow from investments(5) 1.2
Total 19,488.6
Quarterly changes in balances
by source
Item Net purchases Impact of
and sales(1) sales(2)
FEDERAL RESERVE
Deutsche marks .0 .0
Japanese yen .0 .0
Interest receivables(4) ... ...
Other cash flow from investments(5) ... ...
Total ... ...
U.S. TREASURY EXCHANGE
STABILIZATION FUND
Deutsche marks .0 .0
Japanese yen .0 .0
Mexican pesos(6) -69.1 .0
Interest receivables(4) ... ...
Other cash flow from investments(5) ... ...
Total ... ...
Currency
Item Investment valuation
income adjustment(3)
FEDERAL RESERVE
Deutsche marks 90.8 -99.6
Japanese yen 6.2 -230.3
Interest receivables(4) ... ...
Other cash flow from investments(5) ... ...
Total ... ...
U.S. TREASURY EXCHANGE
STABILIZATION FUND
Deutsche marks 45.3 -50.4
Japanese yen 6.2 -331.1
Mexican pesos(6) 69.1 .0(7)
Interest receivables(4) ... ...
Other cash flow from investments(5) ... ...
Total ... ...
Balance,
Item Dec. 31, 1996
FEDERAL RESERVE
Deutsche marks 13,030.1
Japanese yen 6,152.7
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
Japanese yen 9,023.6
Mexican pesos(6) 3,500.0
Interest receivables(4) 49.6
Other cash flow from investments(5) 6.2
Total 19,161.7
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 Agreement. 2. Net profits or losses (-) on 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 Federal Reserve foreign exchange operations based on historical cost-of-acquisition exchange rates, 1996:Q4 Millions of dollars
U.S. Treasury
Exchange
Federal Stabilization
Period and item Reserve Fund
Valuation profits and losses on
outstanding assets and liabilities,
Sept. 30, 1996
Deutsche marks 2,065.5 636.6
Japanese yen 1,211.2 1,783.0
Total 3,276.8 2,419.6
Realized profits and loses
from foreign currency sales,
Sept. 30, 1996-Dec. 31, 1996
Deutsche marks .0 .0
Japanese yen .0 .0
Total .0 .0
Valuation profits and losses on
outstanding assets and liabilities,
Dec. 31, 1996(1)
Deutsche marks 1,965.9 586.1
Japanese yen 984.5 1,450.8
Total 2,950.4 2,036.9
NOTE. Figures may not sum to totals because of rounding. (1) Valuation profits or losses are not affected by peso holdings, which are canceled by forward contracts. 4. Drawings/rollovers and repayments (-) by Mexican monetary authorities, 1996: Q4 Millions of dollars Currency arrangements Outstanding, with the U.S. Treasury Sept. 30, Oct. Nov. Dec. Exchange Stabilization Fund 1996 Bank of Mexico Regular 0 0 0 0 Medium-term 3,500 0 0 0 Currency arrangements Outstanding, with the U.S. Treasury Dec. 31, Exchange Stabilization Fund 1996 Bank of Mexico Regular 0 Medium-term 3,500 NOTE: Data are on a value-data 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. |
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