Academic journal article Federal Reserve Bulletin

Treasury and Federal Reserve Foreign Exchange Operations

Academic journal article Federal Reserve Bulletin

Treasury and Federal Reserve Foreign Exchange Operations

Article excerpt

This report, presented by Peter R. Fisher, Executive Vice President, Federal Reserve Bank of New York, and Manager, System Open Market Account, describes the foreign exchange operations of the U.S. Department of the Treasury and the Federal Reserve System for the period from July 2000 through September 2000. Ryan Faulkner was primarily responsible for preparing the report.

During the third quarter, the dollar appreciated 8.2 percent against the euro and 2.0 percent against the yen. On a trade-weighted basis, the dollar ended the quarter 4.1 percent stronger against the currencies of the United States' major trading partners. In addition, the euro depreciated 5.5 percent against the yen over the course of the third quarter. The euro's value during the first half of the quarter was largely influenced by market expectations of a continued net outflow of capital from the euro area, especially related to merger and acquisition activity. During the first week of September, the euro's decline accelerated, prompted by reports of global portfolio reallocations, and contributed to a sharp increase in currency market volatility.

On September 22, the U.S. monetary authorities intervened in the foreign exchange markets, purchasing 1.5 billion euros against the dollar. The operation, which was divided evenly between the U.S. Treasury Department's Exchange Stabilization Fund and the Federal Reserve System, was coordinated with the European Central Bank (ECB) and the monetary authorities of Japan, Canada, and the United Kingdom.


During the first half of the quarter, the euro weakened against the major currencies, having depreciated 4.3 percent against the dollar and 1.5 percent against the yen, and neared the lows reached in May 2000. The depreciation of the euro was widely attributed to market expectations of continued cross-border investment flows out of the euro area that were related to merger and acquisition announcements made in July and August. According to the ECB, the euro area had net outflows of direct investment and portfolio investment in July 2000 of 11.3 billion [European Dollar] and 5.9 billion [European Dollar] respectively.

The euro's depreciation during the first half of the quarter also coincided with uncertainty regarding the growth prospects for the euro area and the perceived risk that inflationary pressures were growing. In addition, weaker-than-expected German business confidence in June and purchasing manager surveys in July suggested to some market participants that the pace of growth in the euro area was moderating. However, higher-than-expected euro-area inflation for June and July solidified expectations that the ECB would tighten monetary policy, with the implied yield on the three-month December euribor futures contract having risen 18 basis points, to a yield of 5.31 percent during the first half of the quarter. Rising import prices and higher oil prices were cited as the main factors behind the jump in headline inflation.

In the United States, economic data releases during the first half of the quarter supported market expectations that the pace of U.S. economic growth was moderating. Among these data were the weaker-than-expected surveys for June and July from the National Association of Purchasing Managers, the Chicago Purchasing Managers Index survey for July, and construction spending for June. During the first half of the quarter, market participants reduced their expectations for additional tightening of U.S. monetary policy before year-end amid signs of subdued inflation. Over this period, the implied yield on the December federal funds futures contract declined 26 basis points, to 6.60 percent, and ended the quarter at 6.49 percent. Signs that growth could be moderating also led many market participants to lower U.S. earnings forecasts for the remainder of the year. …

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