Treasury and Federal Reserve foreign exchange operations - August - October, 1991

Federal Reserve Bulletin, Jan, 1992 by Margaret L. Greene, Roger M. Scher

LAST DAYS OF OCTOBER

During the last days of October, sentiment toward the dollar turned decidedly negative, and the dollar eased across the board. Market participants began to forecast an even feebler U.S. recovery than had been anticipated and to expect further easing of U. S. interest rates. A much worse-than-expected U. S. consumer confidence report, coupled with what were viewed as pessimistic comments about the economy by Federal Reserve Chairman Greenspan, revived expectations that the Federal Reserve would move soon to ease monetary policy. Meanwhile, in Germany, a combination of rising money supply growth, double-digit wage demands, and reports from the Bundesbank and German economic institutes warning of inflationary pressures appeared to market participants to give the Bundesbank reason to tighten monetary policy if it so desired.

Therefore, at the close of the period, market attention was again focused on the contrasting demands on monetary policy in the major countries. With the existing interest rate differentials also remaining adverse to the dollar, the U. S. currency moved lower. The dollar's decline against the yen was somewhat constrained in light of clear evidence that Japanese monetary policy was also on an easing trend. Yet, the dollar closed the August-October period at DM1.6713 and [Yen] 130.75, so that the decline that had started in midsumrner continued well into fall. At these closing levels, the dollar was 9 percent below its high against the mark reached in July but still 16 percent above the all-time low reached in mid-February during the Gulf war. Against the yen, the dollar had come down more than 8 percent from its high in June to trade only 3 percent above its mid-February lows.

The U.S. monetary authorities did not intervene during the period. However, the settlement of a large portion of the U.S. monetary authorities' forward dollar purchases against foreign currencies - which, as previously reported, were initiated in June and July to adjust the foreign currency reserves of the Federal Reserve and Exchange Stabilization Fund (ESF) - took place during the period.

* Three of the forward transactions, entered into with the Bundesbank on June 25, settled during the period: $554.9 million on August 27, $553.6 million on September 27, and $552.3 million on October 28. For each transaction, 60 percent was executed for the account of the Federal Reserve and 40 percent for the account of the ESF. Of the original $5,548.5 million of forward dollars purchased at that time, a remaining $1,101 million will be settled by the end of the calendar year.

* The two remaining forward transactions of $1,000 million each against another foreign currency settled, one on August 19 and the other on September 18. The dollars purchased were split evenly between the Federal Reserve and the ESF.

In other operations, the ESF continued to execute transactions as agreed with the Intemational Monetary Fund (IMF) to facilitate transactions in special drawing rights (SDRs). During the period, it sold German marks against SDRs equivalent to $227.4 million, of which $186.4 million was settled during the period. The ESF also purchased a total of $324.1 million against sales of SDRs with foreign monetary authorities in need of SDRs for payment of IMF charges or for repurchases, of which $273.6 million was settled during the period.