Treasury and Federal Reserve Foreign Exchange Operations

By Cross, Sam Y. | Federal Reserve Bulletin, February 1989 | Go to article overview
Save to active project

Treasury and Federal Reserve Foreign Exchange Operations


Cross, Sam Y., Federal Reserve Bulletin


Treasury and Federal Reserve Foreign Exchange Operations During the early weeks of the period under review, the dollar continued the generally upward trend that had prevailed throughout the summer, moving higher against all major foreign currencies but especially against the German mark. At times during August and to a lesser extent during September, there were episodes of upward pressure whereupon the U.S. authorities intervened, selling dollars to restrain the dollar's rise. As the period progressed, shifts in expectations about the U.S. economic outlook, about the prospects for further increases in U.S. short-term interest rates, and about the progress of external adjustment led to a more cautious attitude toward the dollar, and the currency started to ease. During October, selling pressures intensified, and late that month the U.S. authorities intervened in the foreign exchange market to support the dollar. On balance, the dollar ended the three-month period about 5 1/2 percent lower against the Japanese yen and 5 percent lower against the German mark from levels at the end of July.

In the opening weeks of the period, the dollar was buttressed by the release of economic statistics indicating continued strength in the U.S. economy. The August 5 announcement of preliminary employment data for July, together with an upward revision to June employment data and evidence of increasing capacity utilization, suggested that U.S. economic growth was proceeding at a pace that could give rise to new inflationary pressures. Market participants interpreted these economic statistics as increasing the likelihood that the Federal Reserve would tighten its monetary policy stance. Some observers already claimed to see signs of Federal Reserve tightening and were attracted by the prospects of rising short-term interest rates and the relatively high yields available on dollar-denominated assets. Even so, market participants were somewhat surprised when the Federal Reserve raised the discount rate 1/2 percentage point to 6 1/2 percent on August 9. Subsequently, short-term interest rate differentials favoring the dollar against both the German mark and the Japanese yen widened. On August 10, the dollar reached its period high of DM1.9245 against the mark while trading as high as Y135.20 against the yen. At that time, the dollar was 2 1/2 percent higher against the mark and 1 1/2 percent higher the yen from the start of the period. From its low point around the turn of the year, the dollar had moved up more than 23 percent against the mark and more than 12 percent against the yen.

For several weeks thereafter the dollar traded firmly as market participants adjusted commercial leads and lags and implemented other hedging strategies to take account of the dollar's renewed strength. Sentiment toward the dollar remained bullish, with traders interpreting even potentially unfavorable news as favorable for the dollar. In these circumstances, market participants questioned the degree of the administration's concern over the dollar's rise.

Perceptions that external adjustment was proceeding on track encouraged positive sentiment toward the dollar. Market participants noted that the trade deficit had narrowed with each of the previous three monthly reports, setting in place a trend of improved performance based on varying combinations of strong export performance and slower growth of imports. The August 16 report that the U.S. trade deficit for June had widened to a seasonally adjusted $12.5 billion from a revised $9.8 billion in May initially disappointed the market, and the dollar briefly declined. But strong upward pressure on the dollar soon re-emerged as some market participants seemed to view the widening of the deficit--and in particular the rise in imports--as yet another indication that the Federal Reserve might further tighten its policy stance to counter inflationary pressures. Meanwhile, others noted the favorable implications for increasing U.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

Treasury and Federal Reserve Foreign Exchange Operations
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?