Treasury and Federal Reserve Foreign Exchange Operations

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Treasury and Federal Reserve Foreign Exchange Operations

This quarterly report, covering the period November 1988 through January 1989, provides information on Treasury and System foreign exchange operations. It was presented by Sam Y. Cross, Manager of foreign Operations of the system Open Market Account and Executive Vice President in charge of the Foreign Group of the Federal Reserve Bank of New york. Christopher Rude was primarily responsible for preparation of the report.(1)

The dollar moved lower in November, continuing the decline against most major currencies that had begun in late September. The dollar then gradually found support at the end of November and recovered through most of December and January to return to levels that had prevailed in the autumn. The U.S. monetary authorities intervened to resist the dollar's decline in November and early December and to resist the dollar's rise in January.

The reversal of the dollar's downward momentum during the period reflected shifts in the market's assessment of the strength of the U.S. economy, of the prospects for exchange rate and monetary policies in the United States and elsewhere, and of the effectiveness of the U.S. administration in dealing promptly with pressing economic issues.


When the three-month period opened in November, market sentiment toward the dollar was decidedly negative. With statistics released in October suggesting that U.S. economic expansion might be moderating, market participants assumed that U.S. monetary policy would not be tightened further. They expected that the interest differentials that had attracted inflows into dollar-denominated assets might not continue to be so favorable. Moreover, concerns about the pace of international adjustment had been aroused by recent trade figures. Not only had the trade surpluses of Germany and Japan showed renewed strength, but also the U.S. trade figures released in mid-October showed that the U.S. trade deficit had widened in August. Market participants began to doubt that the substantial trade improvement the United States had experienced during early 1988 would continue. In addition, market participants expressed growing impatience with the lack of progress being made in reducing the U.S. fiscal deficit and with what seemed to be a lack of urgency given to the issue during the 1988 election campaign.

The dollar's decline through October gained momentum late in the month, especially against the yen. Some Japanese investors sold dollars to protect the yen value of their assets against a further drop in the dollar, and many Japanese exporters hedged their dollar receivables well into 1989. The Japanese currency benefited, too, from a favorable market assessment of the ease with which the Japanese economy had shifted from an emphasis on external demand to one on domestic demand, as well as from Japan's ability, as a major oil importer, to benefit from declining oil prices.

By the beginning of November, the dollar had given up most of its midyear gain against the yen to trade at Y125.65. The U.S. monetary authorities continued the intervention operations started at the end of October to counter downward pressure on the dollar. These operations involved purchases totaling $350 million against yen during the first two days of November. (1)The charts for the report are available on request from Publications Service, Board of Governors of the Federal Reserve System, Washington, D.C. 20551.

At the time of the presidential election in the United States, sentiment toward the dollar became even more negative after comments by foreign officials brought the U.S. budget deficit issue back onto center stage. Market participants questioned whether a new administration could successfully negotiate a budget compromise with a Congress controlled even more than before by the opposition party. …