# = pounds sterling
HM Treasury News Release203/98 2 December 1998
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QUARTERLY REPORT ON UK OFFICIAL HOLDINGS OF
FOREIGN CURRENCY AND GOLD:
JULY - SEPTEMBER 1998
The Treasury and the Bank of England published today the
Quarterly Report on UK official holdings of foreign currency
and gold for the period July to September 1998. The report
gives details of the forward foreign exchange position, the
currency composition of foreign currency assets, the size and
currency composition of foreign currency liabilities for the
Exchange Equalisation Account (EEA) and the Bank of England's
holdings of foreign currency and gold.
The report shows that the level of the Government's reserves,
including the forward book was $36.6 billion at end-September,
an underlying increase of $9 million on end-June. Net forward
holdings of foreign currency were $1.28 billion at end-
September.
The level of the Bank of England's holdings of foreign currency
and gold was $2.75 billion at end-September.
No intervention operations were undertaken during the quarter
to end-September with either the Government's reserves or the
Bank of England's holdings.
NOTES TO EDITORS
1. Media copies of the quarterly report are available from the
Treasury Press Office on 0171 270 5185 or from the Bank of
England Press Office on 0171 601 4411.
2. Non-media copies of the report are available from the
Treasury Public Enquiry Unit on 0171 270 4558 or from the Bank
of England on 0171 601 4878.
3. If you have access to the Internet you can find this
information at http://www.hm-treasury.gov.uk and at
www.bankofengland.co.uk.
4. The quarterly report covering October - December 1998 will
be published on 2 March 1999.
QUARTERLY REPORT ON THE UNITED KINGDOM OFFICIAL HOLDINGS OF
FOREIGN CURRENCY AND GOLD
JULY SEPTEMBER 1998
This report contains a commentary on foreign exchange market
developments during the three months July September 1998 and
details changes in the level and composition of UK official
holdings of foreign currency and gold over that period.
I: FOREIGN EXCHANGE MARKET DEVELOPMENTS
Summary
1. The focus for foreign exchange developments in the third
quarter was the volatility in emerging markets. The trigger
was the announcement on 17 August of the floating of the
Russian rouble and of a partial moratorium on Russian debt
repayments. Exchange rates were affected by capital flows
towards the most liquid markets and by shifting interest rate
expectations. Equity markets fell worldwide. Sterling and the
US dollar both depreciated during the third quarter as
expectations of the levels of interest rates in the United
Kingdom and United States were revised downwards.
Sterling developments
2. Table A shows that sterling fell by 3 1/2% on a trade-
weighted basis against the other major currencies during the
period, with most of the depreciation occurring during
September. Though sterling initially appreciated against the
Deutsche Mark following the Russian announcement (up 5 pfennigs
during August), it fell by more than 10 pfennigs during
September as UK interest rate expectations were revised down.
Sterling rose slightly against the dollar as US interest rate
expectations were also revised down.
Table A: Exchange rates and effective exchange rate indices
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30 June 98 31 July 98 28 Aug 98 30 Sept 98 Change
from 30
June 98
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Pound/ERI 107.8 104.2 106.0 103.3 -3.5%
Pound/DM 3.0088 2.9091 2.9530 2.8407 -5.6%
Pound/$ 1.6673 1.6355 1.6632 1.6997 1.9%
$/DM 1.8046 1.7787 1.7755 1.6713 -7.4%
$/Yen 138.80 144.50 143.25 136.18 -1.9%
$/ERI 112.2 114.0 114.9 109.7 -2.2%
JPY/ERI 112.0 107.3 108.3 111.3 -0.6%
DEM/ERI 103.7 104.8 104.7 106.0 2.2%
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Source: Bank of England
International developments
3. The Russian developments in August, and imposition of
exchange controls in Malaysia announced on 1 September, led to
a general review of default risk in emerging markets. Some
Latin American exchange rates, in particular, came under
pressure to devalue. This had a knock-on effect to the US
dollar because Latin America has closer trade and capital links
with the US economy than with other industrialised economies.
US interest rate expectations were revised down and the Federal
Funds target rate was cut by 25 basis points to 5¬% at the end
of September. The US dollar fell by more against the Deutsche
Mark than against the yen, partly because the Japanese
authorities also cut interest rates in the third quarter.
4. Within Europe, exchange rates of countries that will
participate in EMU were largely unchanged against the Deutsche
Mark during the third quarter. But other European currencies
were more volatile as capital flowed towards the most liquid
markets. For example, the Norwegian and Swedish Krone fell by
4% and 6% respectively against the Deutsche Mark. The
depreciation of the Norwegian Krone also partly reflected the
weakness in oil prices. The weakness in primary product
markets also affected other commodity exporting countries'
exchange rates; the Australian and Canadian dollars fell to
historical lows against the US dollar during the third quarter.
II: THE LEVEL AND COMPOSITION OF UK OFFICIAL HOLDINGS OF
FOREIGN CURRENCY AND GOLD
5. The accompanying tables show the size and composition of
the foreign currency and gold holdings of the Exchange
Equalisation Account (EEA) and of the Bank of England. Due to
differences in accounting methodology that are explained in the
footnotes to the tables, no overall total for the EEA and Bank
holdings is shown.
EEA Holdings
6. As shown in Table 1, during the quarter to end-September
the total of foreign currency and gold reserves in the EEA
increased by $ 534 mn. The increase was almost entirely
accounted for by the increase in Capital and Other Items
totalling $ 525 mn. The most significant factor was the
auction of E 500 mn ($ 589 mn) of Euro Notes. The underlying
change in the reserves, that is the change net of Capital and
Other items, was an increase of $ 9 mn. Interest receipts
exceeded interest payments during the quarter: as explained in
the notes to the tables, interest is accounted for on a cash
basis and the net total is therefore subject to considerable
variation. This was offset by small net sales of foreign
currency.
7. During the quarter the UK contributed to international
financial support operations overseen by the International
Monetary Fund. The UK's reserve tranche position at the IMF
increased by $ 387 mn to $ 3,461 mn. The UK contribution to
the activation of the IMF's General Arrangements to Borrow was
a further $ 193 mn.
8. Under EEA accounting methodology the non-US dollar assets
of the EEA are translated to US dollars at exchange rates
(termed 'parity rates') that are set at the end of March each
year and which apply for the subsequent twelve months. The
method of calculation of parity rates, and the level of the
major rates, is set out in Note 3 to the EEA Tables. If
translation to US dollars had been carried out at prevailing
market rates, the total of gold and foreign currency reserves
in the EEA would have been $ 39.8 bn at end-September and
$ 38.0 bn at end-June compared to $ 36.6 bn and $ 36.0 bn
respectively at parity rates.
9. As set out in the Chancellor's letter of 6 May 1997 to the
Governor, if the government so instructs then the Bank, acting
as its agent, may intervene in the foreign exchange market by
buying or selling the government's foreign exchange reserves.
If intervention is undertaken, the quarterly reports will
provide details of the amount and date of the intervention and
an explanation of why it was undertaken. No intervention
operations were undertaken during the quarter to end-September.
10. Foreign currency liabilities, which formally are
liabilities of the National Loans Fund rather than of the EEA,
are set out in Table 2. Footnote 2 to the EEA tables gives
more detail on these liabilities.
11. The second reopening of the Government's 4.25% 2001 Euro
Note was held in July; E 500 mn was sold at this tender. The
total of Euro and ECU Notes and bonds outstanding with the
public therefore rose from E 7.5 bn to E 8 bn during the
quarter. On 7 July the Bank issued, on behalf of the
Government, a Euro Treasury Bill Information Memorandum which
changed the denomination of the UK Government ECU Treasury Bill
programme into euro for bills maturing after the start of 1999.
Tenders totalling ECU 0.7 bn of ECU Treasury Bills and E 0.3 bn
of Euro Treasury Bills were held each month, comprising ECU 200
mn of one-month, ECU 500 mn of three-month and E 300 mn of six-
month bills. The total of Bills outstanding with the public
was therefore maintained at the equivalent of ECU 3.5 bn.
Repayments of non-marketable debt are shown in footnote 6 to
the EEA tables.
Bank of England Holdings
12. The Bank of England's holdings of foreign currency and
gold during the quarter arose partly from foreign currency and
gold deposits placed with the Bank by overseas central banks
and other customers in the course of their banking
relationships with the Bank, and partly from foreign exchange
swaps conducted as part of the Bank's domestic sterling money
market operations. These foreign exchange swaps were
undertaken as a supplement to the Bank's usual money market
techniques to provide sterling liquidity to the market. The
operations are purely technical in nature and have no monetary
policy significance.
13. Under the Bank's accounting methodology holdings of
foreign currency and gold are translated to US dollars at
prevailing market exchange rates. The overall change in the
Bank's holdings of foreign currency and gold during the quarter
to end-September was an increase of $ 1,090 mn. The underlying
change excludes the change in valuation over the month, changes
in holdings arising from changes in foreign currency and gold
deposits placed with the Bank by overseas central banks and
other customers, changes due to the net effect of foreign
exchange swaps conducted in the course of the Bank's money
market operations, and other capital items. There was no
underlying change during the quarter.
14. As set out in the Chancellor's letter of 6 May 1997 to the
Governor, the Bank may also undertake foreign exchange
operations to intervene in support of its monetary policy
objective. If intervention is undertaken, the quarterly
reports will provide details of the amount and date of
intervention and an explanation of why it was undertaken.
Nointervention operations were undertaken during the quarter to
end-September.
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TABLE 1: TRANSACTIONS
EEA USD mn at Parity Rates
SPOT FORWARD TOTAL
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BALANCE AS AT 30 JUNE 34,792 1,231 36,023
PURCHASES (+) / SALES (-) -31 -33 -64
INVESTMENT INCOME 34 39 73
CAPITAL AND OTHER ITEMS 487 38 525
BALANCE AS AT 30 SEPTEMBER 35,282 1,275 36,557
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OVERALL CHANGE 490 44 534
UNDERLYING CHANGE 3 6 9
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BANK OF ENGLAND USD mn at Current Rates
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SPOT FORWARD TOTAL
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BALANCE AS AT 30 JUNE 1,659 0 1,659
PURCHASES (+)/SALES (-) 1,018 -1,017 1
INVESTMENT INCOME 0 0 0
CAPITAL AND OTHER ITEMS 1,089 0 1,089
BALANCES AS AT 30 SEPTEMBER 3,766 -1,017 2,749
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OVERALL CHANGE 2,107 -1,017 1,090
UNDERLYING CHANGE 0 0 0
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TABLE 2: BREAKDOWN OF ASSETS AND LIABILITIES
AT END SEPTEMBER 1998
EEA USD mn at Parity Rates
ASSETS LIABILITIES
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US DOLLARS 10,724 7,821
EU CURRENCIES 15,249 12,524
YEN 1,307 1
OTHER 193 153
TOTAL CURRENCIES 27,473 20,449
SDR 349 2,556
IMF RESERVE TRANCHE 3,461 -
IMF GAB 193 -
GOLD 5,081 -
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TOTAL 36,557 23,054
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BANK OF ENGLAND USD mn at Current Rates
ASSETS LIABILITIES NET ASSETS
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US DOLLARS 962 961 1
EU CURRENCIES 687 686 1
YEN 116 116 0
OTHER 34 34 0
TOTAL CURRENCIES 1,799 1,797 2
GOLD 949 949 0
TOTAL 2,749 2,747 2
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Notes to the EEA Tables
1. The EEA's foreign exchange reserves are held in assets
of high liquidity and credit quality, for the most part
government securities issued by the US, EU countries and
Japan. In the management of the EEA the Bank of England also
makes use of other financial instruments including interest
rate and currency swaps, bond and interest rate futures and
sale and repurchase agreements.
2. The bulk of the government's foreign currency liabilities
consist of marketable international bonds which generally trade
as benchmarks in their sector. At end-September these
comprised three US dollar bonds (two fixed-rate and one
floating-rate) totalling $ 7 bn, a Euro Note totalling h 1.5
bn ($ 1.76 bn equivalent), two ECU Notes totalling ECU 4.0 bn
($ 4.7 bn equivalent), an ECU bond totalling ECU 2.5 bn
($ 2.9 bn equivalent) and ECU 3.5 bn ($ 4.1 bn equivalent) of
ECU and Euro Bills. The rest of the liabilities consist of
remaining non-marketable long-term debt arising from loans made
by the US and Canadian governments during World War II, and
liabilities arising from the Exchange Cover Scheme, under which
HM Treasury undertakes to sell foreign currency to repay local
authority and public corporation borrowing from the European
Investment Bank and European Coal and Steel Community. There
has been no new non-marketable borrowing since the 1980s, and
the debt is being gradually repaid under fixed amortisation
schedules.
3. The EEA tables have been compiled according to EEA
accounting methodology:
- Transactions are accounted for on a cash basis, ie on
settlement.
- Assets are valued on an historic cost basis.
- Liabilities are shown at their nominal value.
- Non-US$ foreign currencies are translated to US$ using the
average of the relevant dollar exchange rates in the three
months up to the end of March each year or using the actual
exchange rates on the last day in March, whichever calculation
gives the lower US$ value. The major translation rates
("Parity Rates") set for the year beginning 31 March 1998 are
shown below. It should be noted that the official reserves
figures in the UK Balance of Payments statistics (The Pink
Book) are expressed in sterling, with translations done at
current market exchange rates.
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Currency Parity Rate vs US$1
Sterling 0.595
Deutsche Mark 1.847
Yen 132.9
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- Gold is valued at the average of the London fixing price for
the three months to end-March, less 25%; or at 75% of its
final fixing price on the last working day in March,
whichever is the lower. The gold price in use during the
year beginning 31 March 1998 is US$ 220.66 per troy ounce.
4. Included within liabilities is the UK's allocation of
IMF Special Drawing Rights (SDRs). In the event of the
winding up of the IMF SDR Department, or in other
circumstances, the UK could be obliged to repurchase SDRs to
the extent of its allocation. It should be noted that the
treatment of the UK SDR allocation in the Pink Book differs.
The SDR allocation is shown therein as a memorandum item.
5. Investment income is net income derived from ownership
of foreign financial assets, including any capital gain or
loss realised on sale. As noted above, income is in general
recognised only when it is realised. The exception to this
rule in the table is that interest on deposits maturing
beyond the quarter date and the accrued interest bought or
sold in the forward leg of a repo agreement are shown as
forward investment income. As a result of this income
recognition policy the published figure may fluctuate
considerably from quarter to quarter. It should be noted
that this is not the same treatment as in the Pink Book.
6. The underlying change in the spot reserves excludes a number of
items, identified as Capital and Other Items, which are included in
he overall change:
- Receipts from HMG Euro Treasury Notes issued totalled
$ 541 million.
- Revaluation arising from EMI swap of $ 38 million.
Due to the mechanics of the swap this appears as a
negative figure in the spot reserves, balanced by a
positive entry in the forward book.
- There were repayments of $ 16 million of public sector
borrowing for which HMG has provided an exchange rate
guarantee under the Exchange Cover Scheme (ECS).
- Receipts from HMG ECU Treasury Bills issued exceeded
repayments on those maturing by $ 1 million.
7. The underlying change is the result of a variety of
transactions, both debits and credits, including, for
example, transactions for Government departments,
transactions with other central banks, and interest receipts
and payments. For these reasons, the underlying change
should not be taken as an indication of market intervention.
Notes to the Bank of England Tables
1. These tables have been compiled on the basis of the
Bank of England's accounting policies. In particular the
following should be noted:
- Assets and liabilities in currencies other than US$ are
translated to US$ at the exchange rates ruling at the end of
the quarter.
- Gold is valued at current market rates on the basis of the
London fixing price, without discount.
- Investment income is recognised on an accruals basis, and
is displayed here net of interest paid on liabilities.
Income accrued in foreign currency that has been exchanged
for sterling is excluded from the table.
2. The Bank's foreign currency and gold assets and
liabilities are published annually in the Bank's Report and
Accounts.
3. The Bank's contribution to the European Monetary
Institute (EMI) of ECU 95mn (US$ 112 mn at the end-September
exchange rate) is largely funded by a deposit from the EEA
of ECU 93 mn. This deposit therefore appears both as a
foreign currency liability of the Bank and as an asset of
the EEA.
Data contained in this report and in previous Quarterly Reports
is published in The Bank of England's Monetary and Financial
Statistics, copies of which may be obtained from the Bank.