History
Intervention Operations 1985-90
Intervention Operations 1993-2000
Credit Operations
The ESF began to conduct foreign exchange market intervention
transactions in 1934 and 1935. Also, it entered into credit
arrangements, starting in 1936. From 1936 to the present,
the ESF has participated in over a hundred credit or loan
arrangements with foreign governments or central banks.
After World War II, the ESF conducted Treasury's monetary
gold transactions and widened its participation in credit
arrangements. Tables presenting all ESF credit arrangements
since 1936 follow in the "Credit Operations" section
below
Treasury policy during 1961-71 period focused on deterring
capital outflows from the United States and giving major
foreign central banks an incentive to hold dollar reserves
rather than demand gold from the U.S. gold stock. The ESF
resumed intervention operations in the foreign exchange
market in March of 1961 (for the first time since the mid-1930s),
but it soon became apparent that the resources of the ESF
alone were too small to sustain transactions of the magnitude
necessary. At the invitation of the Treasury, the Federal
Reserve joined in foreign exchange operations in February
1962. The Federal Reserve entered into a network of swap
agreements with other central banks in order to obtain foreign
currencies for short-term periods for use in absorbing forward
sales of dollars by foreign central banks hedging exchange
risk on their dollar holdings. To provide foreign currency
to repay the Fed's swap drawings, the Treasury during the
1960s issued non-marketable foreign currency-denominated
medium-term securities (Roosa bonds) and sold the proceeds
to the Fed. In August 1971, the United States ceased conducting
gold transactions with foreign monetary authorities, and
the need to moderate the drain on the US gold stock was
eliminated.
In December 1974, ESF turned over, in a sale at par value,
a gold balance of 2.02 million ounces (valued at $85 million)
to the Treasury General Account. This gold had been acquired
prior to August 1971 through gold transactions that the
ESF engaged in with foreign monetary authorities and with
the market for the purpose of stabilizing the value of the
dollar relative to gold. In a public announcement of this
sale of gold by the ESF to the Treasury General Account,
the Treasury stated that the sale was made "in view of the
likelihood that the Exchange Stabilization Fund [would]
not be engaging in further transactions to stabilize the
value of the dollar relative to gold." The ESF again had
gold on its books for a short period in 1978 as a counterpart
to an ESF credit to Portugal.
Later in the 1970s, the US monetary authorities built up
foreign currency reserves substantially. For this purpose,
the ESF entered in a $1 billion swap agreement with the
Bundesbank in January 1978 (which has since been allowed
to expire). In connection with the dollar support program
announced in November 1978, the Treasury issued foreign
currency-denominated securities (Carter bonds) in the Swiss
and German capital markets to acquire additional foreign
currencies needed for sale in the market through the ESF.
The United States also drew its reserve position in the
IMF.
In the mid-1980s, the major industrial nations embarked
on a process of intensified policy coordination. The Group
of Five's (G-5) Plaza Agreement in September 1985 served
to reinforce exchange rate adjustments among the major currencies
and occasioned substantial coordinated intervention sales
of dollars. The G-5 "agreed that exchange rates should play
a role in adjusting external imbalances
should better
reflect fundamentals
and that
some further orderly appreciation
of non-dollar currencies against the dollar is desirable."
In the Louvre Accord of February 1987, the major industrial
countries agreed that the exchange rate changes since the
Plaza Agreement would "increasingly contribute to reducing
external imbalances and
[had] brought their currencies
within ranges broadly consistent with underlying economic
fundamentals
[and agreed to cooperate closely to foster
stability of exchange rates around current levels." They
adopted specific measures and cooperative arrangements reflecting
their view that their currencies were broadly consistent
with underlying economic fundamentals. This framework for
cooperation on exchange rates complemented the broader economic
policy coordination efforts to promote growth and external
adjustment. In December 1987, the Group of Seven (G-7) reaffirmed
Louvre's basic objectives and policy directions and agreed
to intensify their economic policy coordination efforts
and to cooperate closely on exchange markets. There was
continued active cooperation through late 1989, but such
activities became less frequent thereafter.
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Intervention Operations 1985-90. There were numerous
episodes of intervention during this period, some involving
net purchases of foreign currencies by the US monetary authorities
and some involving net sales of foreign currencies. These
operations were generally carried out in conjunction with
operations by a number of other countries' monetary authorities,
including those of the major industrialized countries.
Table showing amounts of
US intervention, 1985-90
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Intervention Operations 1993-2000. In the 1993-2000
period, there were fewer, but larger interventions.
There was intervention on 20 days during this period, always
in conjunction with at least one other member of the G-7,
but only two of these operations took place after August
1995. In the period April 1993 - November 1994, the ESF
sold foreign currencies on a number of occasions. The dollar
reached historical lows vs. the DM and the yen in March
and April 1995 respectively. The US monetary authorities
sold foreign currencies on four days from March through
May. The May intervention was explicitly linked to the G-7's
April 25 statement of "concern about recent developments
in exchange markets
that recent movements have gone beyond
the levels justified by underlying economic conditions in
the major countries
[and] that orderly reversal of those
movements is desirable
" There were further sales of foreign
currencies in July and August. In June 1998, the ESF entered
the market as a buyer of foreign currency for the first
time in six years and purchased yen in the context of Japans
plans to strengthen its economy. In September 2000, the
ESF bought euros, in a coordinated intervention at the initiative
of the ECB, on shared concern about the potential implications
of euro movements for the world economy.
Table showing amounts of
US intervention, 1993-2000
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Credit Operations.. In February 1995 the President
decided to use the ESF to provide up to $20 billion in assistance
to Mexico. Building on the North American Framework Agreement
(NAFA) and the ESF's standing Exchange Stabilization Agreement
(ESA) with Mexico under NAFA, the February agreements provided
for support in the form of short-term swaps, medium-term
swaps (up to 5 years), and securities guarantees (up to
10 years). The February agreements included an Oil Proceeds
Facility Agreement that provided Treasury with a source
of repayment through Mexican oil export proceeds if needed.
Treasury also agreed with the Fed that any Fed claim on
Mexico remaining outstanding beyond one year could be assigned
to the ESF. In 1995, Mexico drew on the medium-term facility
in an amount totaling $10.5 billion. Mexico fully repaid
the drawings in advance, by January 1997. The ESA remains
the ESF's only standing swap line.
In November 1998, the United States committed to use the
ESF for up to $5 billion of a multilateral guarantee of
a $13.2 billion Bank for International Settlements (BIS)
credit facility for Brazil. Drawings by Brazil on the BIS
totaled $8.65 billion, and the ESF's share of the guarantee
of these drawings amounted to $3.3 billion. Brazil had fully
repaid these drawings by April 2000.
The accompanying table shows ESF credit arrangements that
entered into force from 1936 to 2002 and offers a brief
description of each. In addition to the arrangements listed
here, Treasury extended an overnight credit on September
30, 1967 and a $200 million line of credit in March 1968,
both as part of multilateral operations to support the pound.
Tables
showing credit arrangements since 1936
3. The ESF had a large number of swap lines
after W.W.II, primarily with Latin American countries, but
these were gradually eliminated and, by 1970, only a swap
line with Mexico remained. In 1994, this swap line was brought
under the North American Framework Agreement.
4. The Federal Reserve eliminated almost
all of its swap lines after years of disuse and in connection
with the advent of the European Central Bank on January
1, 2000 and now has swap lines only with Mexico and Canada
under the 1994 North American Framework Agreement. (D2)
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