Treasury and Federal Reserve Foreign Exchange Operations

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This report describes Treasury and System foreign exchange operations for the period from July through September 1994. It was prepared by Peter R. Fisher, Executive Vice President, Federal Reserve Bank of New York, and Manager for Foreign Operations, System Open Market Account. Nicholas Pifer was primarily responsible for preparation of the report.(1)

During the July--September quarter, the dollar consolidated within increasingly narrow ranges. It rose 0.6 percent against the Japanese yen and 0.1 percent against the Mexican peso but declined 2.3 percent against the German mark, 2.9 percent against the Canadian dollar, and 1.9 percent on a trade-weighted basis.(2) Much of the period was characterized by thin summer markets and the predominance of interbank dealers and short-term speculative traders--conditions that occasionally resulted in abrupt but temporary movements in exchange rates. U.S. monetary authorities did not conduct any intervention operations during the quarter.



At the end of the previous period, with the dollar trading at DM1.5869 and [yen]98.50, many market participants perceived a risk of a further decline in the dollar, given the prospect of stronger growth in Europe and concern about the continued trade imbalances of the United States and Japan. There was some market anticipation in advance of the Naples Summit that the G-7 might launch a coordinated "dollar support package." When no formal dollar support package was announced, the dollar resumed its decline. On Monday, July 11, the dollar dropped sharply as some market participants liquidated remaining long-dollar positions and others established sizable short-dollar positions. The dollar fell further the next day, briefly reaching a twenty-month low of DM1.5165 against the mark and a new postwar low of [yen]96.60 against the yen. With the dollar perceived as oversold on a technical basis, however, traders soon took profits on their short-dollar positions, and by the end of the week the dollar had recovered almost all of its post-summit losses.

The dollar rose further in mid-July, when senior U.S. officials articulated a clear preference for a stronger dollar and highlighted its advantages for the U.S. economy. Treasury Secretary Bentsen stated on July 14, "We're going to continue to be in accord with the Federal Reserve as far as their objectives to see that we have substantial growth with low inflation and work toward a stronger dollar." On July 20, Federal Reserve Chairman Alan Greenspan, in his semiannual Humphrey--Hawkins testimony before the Senate Banking Committee, said that he was troubled by the dollar's decline and noted, "any evidences of weakness in [the dollar] are neither good for the international financial system nor good for the American economy." The next day, Treasury Undersecretary Lawrence Summers, in his semiannual report to the Congress on international economic and exchange rate policy, stated the following:

The Administration believes that a strengthening of the dollar against the yen and the mark would have important economic benefits for the United States. It would restore the confidence in financial markets that is important to sustaining recovery. It would boost the attractiveness of U.S. assets and the incentive for longer-term investment in the economy, and help to keep inflation low. In addition we believe--and this view is shared by other G-7 countries--that a renewed decline of the dollar would be counterproductive to global recovery.

Market participants reacted positively to these remarks. Earlier worries that U.S. officials were unconcerned about the dollar began to dissipate, and by the end of July the dollar had moved back to DM1.5830 and [yen]99.85.


The dollar continued to rise gradually against the yen in late July and early August, reaching its period high of [yen]101. …