Foreign Exchange Operations

The New York Fed is authorized by the Federal Open Market Committee (FOMC) to intervene in the foreign exchange (FX) market by executing FX transactions for the System Open Market Account (SOMA), as directed by the FOMC, and, in its capacity as fiscal agent of the United States, for the Exchange Stabilization Fund (ESF), as directed by the U.S. Treasury. The New York Fed also provides FX transaction services to its official sector account holders, U.S. government agencies (as directed by the U.S. Treasury), and the Federal Reserve System.

The Federal Reserve and the U.S. Treasury may intervene in the FX market when required to counter disorderly market conditions. After the breakdown of the Bretton Woods system in 1971, the United States monetary authorities (the Federal Reserve and the U.S. Treasury) used FX intervention both to reduce excess exchange rate volatility and to signal the views of the U.S. that the exchange rate did not reflect fundamental economic conditions. However, since 1996, the U.S. has only intervened on three separate occasions, including a purchase of Japanese yen in June 1998, a purchase of euros in September 2000, and a sale of Japanese yen in March 2011.

Interventions, at the direction of the FOMC or Treasury, are executed by the New York Fed. When a decision is made to support the dollar's value against another currency, the New York Fed's Open Market Trading Desk (the Desk) buys dollars and sells that foreign currency; conversely, to reduce the value of the dollar, it sells dollars and buys the foreign currency.

In the context of an operation to support the dollar's value against another currency, the foreign currencies that are used to intervene have historically come equally from foreign exchange reserves held in the SOMA portfolio and the ESF. These holdings currently are in euros and Japanese yen. Interventions have historically been coordinated with other central banks, especially those that issue the currency or currencies involved in the intervention.

Separate from interventions, the Desk also provides FX transaction services to three primary sets of customers: the United States government and its agencies (as fiscal agent), foreign central banks and monetary authorities that hold accounts with the New York Fed, and the Federal Reserve System. FX transactions for the United States government and its agencies typically facilitate foreign-currency-denominated payments. These transactions typically make up the majority of the Desk's FX trading volume. Foreign central banks that hold accounts at the New York Fed also regularly request FX transactions. Occasionally, the Desk also facilitates certain foreign-currency-denominated payments for the Board of Governors or other Federal Reserve Banks.

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