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 January through March 1998. 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. Daniel Osborne was primarily responsible for preparation of the report. During the first quarter of 1998, the dollar appreciated 2.8 percent against the German mark and 2.2 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. . On a trade-weighted basis against Group of Ten (G-10) currencies, the dollar appreciated 1.9 percent.(1) Against the mark, the dollar traded in a relatively narrow range through most of the period. This range reflected market expectations of stable monetary policy in both 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 Germany as well as reduced volatility in European currencies, as expectations for a smooth progression toward the European Economic and Monetary Union (EMU emu or emeu (both: ē`my  ), common name for a large, flightless bird of Australia, related to the cassowary and the ostrich. ) solidified 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. . Against the yen, the dollar retreated from five-year highs reached early in the period, as it was pressured lower by the possibility of official intervention to support the yen and by comments from Japanese politicians calling for measures to stimulate Japan's economy. The dollar later rebounded as expectations for additional Japanese stimulus waned and as 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. refocused on the diverging di·verge v. di·verged, di·verg·ing, di·verg·es v.intr. 1. To go or extend in different directions from a common point; branch out. 2. To differ, as in opinion or manner. 3. economic outlooks for the United States and Japan. Although the dollar was little changed on net over the period, other asset prices experienced significant appreciation. Global bond and equity markets reached record highs, and many Asian markets rebounded from earlier weakness. The U.S. monetary authorities did not intervene In the foreign exchange markets during the quarter. STRONG PERFORMANCE OF U.S. AND EUROPEAN STOCKS AND BONDS Expectations of steady U.S. monetary policy solidified over the period as market participants focused on the countervailing effects of a drag from the slowdown of Asian economies and the continued signs of strong domestic demand in the United States. Comments by Chairman Greenspan and Governor Meyer In early January were interpreted as suggesting concern over the potential deflationary de·fla·tion n. 1. The act of deflating or the condition of being deflated. 2. A persistent decrease in the level of consumer prices or a persistent increase in the purchasing power of money because of a reduction in available effect of an Asian economic slowdown on the U.S. economy. As a result, there was some speculation that the next move by the Federal Open Market Committee (FOMC See Federal Open Market Committee. FOMC See Federal Open Market Committee (FOMC). ) could be an ease. The yield implied by the April 1998 contract on 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 futures declined to levels below the 5.50 percent funds target--reaching a low of 5.31 percent on January 9--and the benchmark thirty-year Treasury Thirty-Year Treasury A U.S. Treasury debt obligation that has a maturity of 30 years. The 30-year Treasury is the benchmark U.S. bond and one of the world's most closely watched financial instrument. bond yield fell to an all-time low of 5.69 percent on January 12. Expectations for FOMC policy shifted to a more balanced view after Chairman Greenspan's Humphrey-Hawkins testimony on February 24. Market participants interpreted the testimony as emphasizing a domestic environment of tight 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 domestic demand, while depicting less concern over the potential effect of the Asian slowdown. After the testimony, the implied yield on the contract on April federal funds futures rebounded to levels higher than 5.50 percent, while the benchmark bond Benchmark Bond A bond that provides a standard against which the performance of other bonds can be measured. Government bonds are almost always used as benchmark bonds. Also referred to as "benchmark issue" or "bellwether issue". yield reached a high for the quarter of 6.07 percent on March 3. Expectations for steady policy solidified despite subsequent evidence of tight labor markets and strong domestic demand, and the thirty-year benchmark yield fell 13 basis points from its peak, to end the period at 5.94 percent. Low inflation and anticipation of diminished issuance of Treasury securities supported this decline. In Germany, expectations for steady monetary policy also solidified amid a benign inflationary in·fla·tion·ar·y adj. Of, associated with, or tending to cause inflation: inflationary prices; inflationary policies. Adj. 1. outlook, concern over high unemployment levels, and the ongoing belief that official European interest rates would converge to German levels ahead of the EMU. Also contributing to the steady policy outlook was continued concern over the potential deflationary effect of an Asian economic slowdown on German growth. The yield implied by three-month German mark forward rate agreements three months hence fell 10 basis points, to 3.73 percent, while the yield on ten-year government bonds declined 51 basis points to close at an all-time low of 4.86 percent on March 24. Also underpinning un·der·pin·ning n. 1. Material or masonry used to support a structure, such as a wall. 2. A support or foundation. Often used in the plural. 3. Informal The human legs. Often used in the plural. the rally were expectations that continued fiscal consolidation in Europe would further diminish bond issuance. Against this background of stable monetary policy, reduced volatility, low inflation, and falling yields, investor risk appetites appeared to be on the rise. Equity markets in the United States and Europe reached record highs, with 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. rising 11.3 percent during the quarter and both German and French benchmark indexes rising 20.7 and 29.2 percent respectively. Southern European stock markets performed even better, as prospects for lower interest rates ahead of the EMU and cross-border corporate consolidation fueled gains of more than 40 percent in Portugal, Italy, and Spain. RELATIVELY NARROW 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. OF THE DOLLAR AGAINST THE MARK The dollar traded in a DM 1.78-1.85 range against the mark through most of the period. 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 dollar-mark, options declined 4 percentage points to reach an eight-month low of 7.95 percent on March 25, while longer-dated 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. remained largely neutral, apparently reflecting expectations that the dollar would continue to trade within a narrow range. In addition, the expectations of relatively steady policy in both countries, the concurrent rallies in both U.S. and European equity markets, and perceptions of a smooth progression toward the EMU all contributed to the limited volatility of the dollar-mark exchange rate. Late in the period, the dollar traded to highs near DM 1.85, as sales of the mark against the British pound and the steady widening of U.S.-German interest rate differentials weighed on the German currency. The spread of U.S. ten-year bonds over comparable German instruments increased 57 basis points to close the period at 82 basis points. REBOUND OF THE DOLLAR FROM PERIOD LOWS AGAINST THE YEN AMID INCREASING UNCERTAINTY REGARDING THE JAPANESE ECONOMIC OUTLOOK After having reached five-year highs against the yen early in the period, the dollar declined more than 8 percent by mid-February then rebounded to end the period slightly stronger than at the end of 1997. The dollar traded to a five-year high of 134.30 [yen] on January 6, as market participants continued to focus on the diverging economic outlooks in the United States and Japan, but reversed its upward trend in subsequent weeks. Early in the quarter, signs of 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 in other Asian markets diminished the dollar's perceived "safe-haven" status. Moreover, market uncertainty regarding potential intervention by the Japanese monetary authorities in support of the yen also contributed to the dollar's weakness, with Japanese Vice Finance Minister Sakakibara warning on numerous occasions that excessive yen weakness was not desirable. Various comments from Japanese politicians suggesting that significant economic stimulus measures would be forthcoming also contributed to uncertainty regarding the direction of the dollar-yen exchange rate. In an address to the Japanese parliament on January 12, Prime Minister Hashimoto spoke of the need for a 30 [yen] trillion plan to support the banking sector, focusing attention on potential banking reform measures. The yen was further supported by gains in the Nikkei index, triggered by a government proposal to change land valuation accounting methods and alter capital requirements Capital requirements Financing required for the operation of a business, composed of long-term and working capital plus fixed assets. of Japanese banks. These factors contributed to an unwinding of long dollar positions by market participants, and the dollar reached a low of 123.17 [yen] on February 10. In subsequent weeks, the dollar began to reverse its downward trend as market participants increasingly adopted the view that the proposed stimulus measures would not provide a significant boost to the Japanese economy. Market participants' expectations for the Japanese economy deteriorated amid continued signs of domestic weakness, as evidenced by record unemployment, weak private consumption data, and high inventory levels. The release of the February 20 package did little to alter 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 prospects, and the dollar continued to strengthen, rising nearly two yen on the day of the release to close at 127.82 [yen]. Treasury Secretary Rubin's reiteration reiteration in eukaryotes, multiple copies of certain relatively short nucleotide sequences that are repeated from a few times to millions of times; three classes are defined, single copy, moderately reiterated and highly reiterated; some occur as inverted repeats. that a strong dollar was in the United States' best interest also contributed to yen weakness. Reports of widening scandals involving Japanese monetary officials helped lift the dollar above 130 [yen] by mid-March. However, further gains were restrained by expectations that both the yen and Japanese assets might be supported through fiscal year-end Fiscal Year-End The completion of a one-year, or 12-month, accounting period. Notes: The reason that a company's fiscal year often differs from the calendar year and does not close on Dec 31, is due to the nature of company's needs. . Despite the uncertain outlook for the dollar against the yen in the near term, the options market suggested more positive dollar sentiment in the longer term. Twelve-month risk reversals remained skewed skewed curve of a usually unimodal distribution with one tail drawn out more than the other and the median will lie above or below the mean. skewed Epidemiology adjective Referring to an asymmetrical distribution of a population or of data toward dollar calls, reflecting a higher cost of protection against a sharp appreciation of the dollar against the yen. Further reflecting market uncertainty over the Japanese economic outlook, the benchmark Japanese bond yield declined from a high of 1.82 percent on January 29, to a new low of 1.49 percent on March 25. A RELATIVELY MUTED mut·ed adj. 1. a. Muffled; indistinct: a muted voice. b. Mute or subdued; softened: muted colors. 2. PERFORMANCE FOR THE DOLLAR AMID A REBOUND IN ASIAN MARKETS AND A DECLINE IN VOLATILITY Against the backdrop of steady Group of Three monetary policies, strengthening bond and equity markets in the United States and Europe, and declining volatility in key asset prices, several emerging markets recovered some of the losses posted in previous months. Efforts by international organizations to stabilize the region also lent support to these markets. The steps taken by the governments of Korea and Thailand to adhere to adhere to verb 1. follow, keep, maintain, respect, observe, be true, fulfil, obey, heed, keep to, abide by, be loyal, mind, be constant, be faithful 2. measures agreed upon Adj. 1. agreed upon - constituted or contracted by stipulation or agreement; "stipulatory obligations" stipulatory noncontroversial, uncontroversial - not likely to arouse controversy with the International Monetary Fund (IMF IMF See: International Monetary Fund IMF See International Monetary Fund (IMF). ) and the arrangements by international creditors to restructure Korean short-term external debt payments also encouraged a reallocation Noun 1. reallocation - a share that has been allocated again allocation, allotment - a share set aside for a specific purpose 2. reallocation of investor funds back into these markets. As local demand for dollars to repay dollar-denominated debt subsided, and as international investor inflows resumed, the currencies of many Asian countries Noun 1. Asian country - any one of the nations occupying the Asian continent Asian nation country, land, state - the territory occupied by a nation; "he returned to the land of his birth"; "he visited several European countries" rebounded, led by a 17.6 percent appreciation of 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. against the U.S. dollar. Asian equities responded positively to the return of capital inflows, with the Korean KOSPI KOSPI Korea Composite Stock Price Index index rising nearly 53 percent by early March, before retracing to post a gain on the quarter of 27.8 percent. The improved sentiment in Asia helped Latin American and Eastern European equity markets rebound as well, with Brazilian stocks posting a 17.2 percent gain during the period. As global equity markets rebounded, emerging market bond yields fell, with yield spreads of dollar-denominated Korean and Thai debt issues over 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. declining nearly 200 basis points. Similarly, a decline in risk premiums in Asia contributed to declines in 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 U.S. Treasury securities. While sentiment toward most emerging markets improved, sentiment toward Indonesia remained cautious, given its government's perceived unwillingness to move ahead with reforms that had previously been agreed upon with the IMF. Yield spreads of dollar-denominated Indonesian debt issues over U.S. Treasury securities widened 25 basis points over the period. However, uncertainty in Indonesia had a limited effect on regional markets as investors appeared increasingly willing to differentiate between countries. 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 $16.6 billion for the Federal Reserve System and $13.6 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 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 agreement by the U.S. monetary authorities totaled $10.7 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. [CHARTS 1-9 ILLUSTRATION OMITTED] (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. .
1. Foreign exchange holdings of U.S. monetary authorities based
on current exchange rates, 1998:Q1
Millions of dollars
Quarterly changes in
balances by source
Impact
Balance Net purchases of sales
Item Dec. 31, 1997 and sales(1) (2)
FEDERAL RESERVE
Deutsche marks 11,486.7 .0 .0
Japanese yen 5,473.4 .0 .0
Interested receivables(4) 82.9 ... ...
Other cash flow from
investments(5) 3.2 ... ...
Total 17,046.2 ... ...
U.S. TREASURY
EXCHANGE STABILIZATION FUND
Deutsche marks 5,815.6 .0 .0
Japanese yen 8,024.6 .0 .0
Interested receivables(4) 38.5 ... ...
Other cash flow from
investments(5) 5.9 ... ...
Total 13,884.6 ... ...
Currency Interest
valuation accrual
Investment adjustments (net) and
Item income (3) other
FEDERAL RESERVE
Deutsche marks 96.9 -317.7 .0
Japanese yen 1.8 -113.8 .0
Interested receivables(4) ... ... -9.9
Other cash flow from 7.5
investments(5) ... ... 2.4
Total 98.7 -431.5
U.S. TREASURY
EXCHANGE STABILIZATION FUND
Deutsche marks 48.3 -160.8 .0
Japanese yen 1.5 -165.7 .0
Interested receivables(4) ... ... -1.8
Other cash flow from
investments(5) ... ... 12.3
Total 49.8 -326.5 10.5
Balance,
Item Mar. 31, 1998
FEDERAL RESERVE
Deutsche marks 11,265.9
Japanese yen 5,361.4
Interested receivables(4) 73.0
Other cash flow from
investments(5) 10.7
Total 16,711.0
U.S. TREASURY
EXCHANGE STABILIZATION FUND
Deutsche marks 5,703.1
Japanese yen 7,860.4
Interested receivables(4) 36.7
Other cash flow from
investments(5) 18.2
Total 13,618.4
(1.) Purchased 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 different 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 valued at month-end exchange rates. Interest receivables for the Federal Reserve System are carried at average cost of acquisition and are not marked 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, 1998: Q1
Millions of dollars
U.S. Treasury
Exchange
Federal Stabilization
Period of item Reserve Fund
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
Realized profits and losses
from foreign currency sales,
Dec. 31, 1997-Mar. 31, 1998
Deutsche marks .0 .0
Japanese yen .0 .0
Total .0 .0
Valuation profits and losses on
outstanding assets and liabilities,
Mar. 31, 1998
Deutsche marks -251.4 -536.1
Japanese yen 174.5 263.1
Total -76.9 -273.0
3. Currency arrangements, March 31, 1998
Millions of dollars
Amount of Outstanding
Institution facility Mar. 31, 1998
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 Banks 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
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