Foreign Currency Resources
The main source of foreign currencies used in
U.S.
intervention operations currently is U.S. holdings of foreign exchange
reserves. At the end of June 2004, the United States held foreign currency
reserves valued at $40 billion. Of this amount, the Federal Reserve held foreign
currency assets of $20 billion, and the Exchange Stabilization Fund of the
Treasury held the rest.
The U.S. monetary authorities have also
arranged swap facilities with foreign monetary authorities to support foreign
currency operations. These facilities, which are also known as reciprocal
currency arrangements, provide short-term access to foreign currencies. A swap
transaction involves both a spot (immediate delivery) transaction, in which the
Federal Reserve transfers dollars to another central bank in exchange for
foreign currency, and a simultaneous forward (future delivery) transaction, in
which the two central banks agree to reverse the spot transaction, typically no
later than three months in the future. The repurchase price incorporates a
market rate of return in each currency of the transaction. The original purpose
of swap arrangements was to facilitate a central bank’s support of its own
currency in case of undesired downward pressure in foreign exchange markets.
Drawings on swap arrangements were common in the 1960s but over time declined in
frequency as policy authorities came to rely more on foreign exchange reserve
balances to finance currency operations.
In years past, the Federal Reserve had standing commitments to swap
currencies with the central banks of more than a dozen countries. In the middle
of the 1990s, these arrangements totaled more than $30 billion, but they were
almost never drawn upon. At the end of 1998, these facilities were allowed to
lapse by mutual agreement among the central banks involved, with the exception
of arrangements with the central banks of Canada and Mexico.
Reciprocal currency arrangements can be an important policy tool in
times of unusual market disruptions. For example, immediately after the
terrorist attacks of September 11, 2001, the Federal Reserve established
temporary swap arrangements with the European Central Bank and the Bank of
England, as well as a temporary augmentation of the existing arrangement with
the Bank of Canada. The purpose of these arrangements was to
enable the foreign central banks to lend dollars to local financial institutions
to facilitate the settlement of their dollar obligations and to guard against
possible disruptions to the global payments system. The European Central Bank
drew $23.5 billion of its swap line; the balance was repaid after three days.
The other central banks did not draw on their lines. The temporary arrangements
lapsed after thirty days.
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