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138/99 2 September 1999
QUARTERLY REPORT ON UK OFFICIAL HOLDINGS OF FOREIGN CURRENCY AND GOLD: APRIL - JUNE 1999 The Treasury and the Bank of England published today the Quarterly
Report on UK official holdings of foreign currency and gold for the
period April to June 1999. 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 $34.83 billion at end-June, with no underlying
increase on end-March 1999. Net forward holdings of foreign currency
were $562 million at end-June. The level of the Bank of England's holdings of foreign currency and gold was $4.26 billion at end-June. No intervention operations were undertaken during the quarter to end-June 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 July - September 1999 will be published on Thursday 2 December 1999.
QUARTERLY REPORT ON THE UNITED KINGDOM OFFICIAL HOLDINGS
OF FOREIGN CURRENCY AND GOLD APRIL - JUNE 1999 This report contains a commentary on foreign exchange market
developments during the three months April June 1999 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 The US dollar continued to strengthen over the quarter, reflecting the continued strong performance of the US economy. The euro weakened. Sterling strengthened against the euro and weakened against the dollar, gaining ground slightly in overall terms. Sterling developments 2. Sterling's effective exchange rate ended the quarter up over 1%, although within this overall movement sterling weakened against the dollar by 2.3% and strengthened against the euro by 2.2%. Sterling official interest rates were cut twice during the quarter, on 8 April and on 10 June.
Table A: Exchange rates & effective exchange rate indices
Source: Bank of England * Change in £ / Euro International developments 3. The US dollar rose in effective terms by 1.8% over 1999Q2, gaining strength against most major currencies, including the yen, sterling and the euro. The strength of the dollar reflected the continuing strong performance of the US economy and was accompanied by firmness in the US stock market. In the second half of the quarter there were growing expectations that the Fed would increase official interest rates, particularly following the FOMC's adoption of a bias to tighten on 18 May. The Fed did in the event raise rates by 25 basis points at its meeting on 30 June. 4. The euro continued to weaken through the second quarter - by 2.4% in effective terms, by 4.4% against the dollar, by 2.2% against the yen and by 2.2% against sterling. 5. The yen closed the quarter weaker against the dollar and stronger
against the euro. Towards the end of the quarter, however, upward
revisions to forecasts for Japanese economic growth and the much stronger
than expected official estimate of GDP growth in 1999Q1 led to some
yen strengthening. Official intervention was undertaken to limit the
yen's appreciation, selling it against both the dollar and the euro.
Underlying demand for yen remained in evidence, reflecting Japan's
continuing current account surplus as well as the repatriation of
foreign currency assets by Japanese investment institutions.
II: THE LEVEL AND COMPOSITION OF UK OFFICIAL HOLDINGS OF FOREIGN CURRENCY AND GOLD 6. 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 7. As shown in Table 1, during the quarter to end-June, the total of foreign currency and gold reserves in the EEA fell by $ 430mn from the end-March post-revaluation figure of $ 35,262mn to $ 34,832mn. The reduction was more than accounted for by Capital and Other Items totalling $ 432mn(1) . There was no underlying change in the reserves (i.e. the change net of Capital and Other Items) over the quarter. If translation to US dollars had been carried out at prevailing market rates rather than at parity rates, the total of gold and foreign currency reserves in the EEA would have been $ 36.9bn at end-March and $ 35.4bn at end-June. The difference between the total at prevailing market rates and at parity rates at end March is primarily due to the 25% discount applied to the value of gold for the latter. 8. 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-June.
9. 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.
10. In January, the UK reopened the latest note under its Euro Note
Programme, selling a further 500mn of the 2.75% 2002 Euro Note by
auction. The total of Euro Notes and bonds outstanding with the public
therefore rose from 7bn to 7.5bn during the quarter. In addition,
auctions totalling 700mn of Euro Treasury Bills were held each month,
comprising 200mn of one-month bills and 500mn of three-month bills.
The total Euro Treasury Bills outstanding with the public fell from
3.5bn to 2.6bn during the quarter. This began the process announced
in January, under which the Bank of England will progressively take
over as issuer of Euro Bills from April 1999 (see paragraph 14 below).
By October 1999, all Euro Treasury Bills will have matured and the
Bank of England will have fully taken over the programme. Repayments
of non-marketable debt are shown in footnote 6 to the EEA tables..
11. On 7 May, HM Treasury announced a restructuring of the UK's reserve holdings to achieve a better balance in the portfolio by increasing the proportion held in currency. This involves a programme of auctions of gold from the EEA, with the proceeds being retained in the reserves and invested instead in foreign currency assets. The first of these auctions was held on 6th July and does not, therefore, feature in Q2 data. Further details of the programme and the results of the July auction are available from the Treasury and Bank of England Press Offices and their respective web sites.
Bank of England Holdings 12. The Bank of England's holdings of foreign currency and gold stood at $ 4,258mn at the end of the quarter. These arose from the following operations: - 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; - foreign exchange swaps conducted as part of the Bank's domestic sterling money market operations. These swaps are undertaken as a supplement to the Bank's usual money market techniques to provide sterling liquidity to the market, and are purely technical in nature; - foreign exchange swaps and foreign currency-denominated securities, interest rate swaps and asset swaps undertaken to fund and hedge the euro balances that the Bank holds as a consequence of the UK's connection to the TARGET payments system; - euro balances with other central banks operating the TARGET system. These are very largely off-set by similar balances that the other central banks hold at the Bank and as a result are shown net in the tables below, where they account for $ 161mn at end-June. The gross amount at end-June was $ 120,055mn. 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-June was an increase of $499mn.
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 transactions
conducted in the course of the Bank's money market operations and
in connection with TARGET, changes on euro balances with other central
banks operating the TARGET system, and other capital items. There
was no underlying change during the quarter. 14. As announced on 5 January the Bank of England took over from HM Treasury as the issuer of Euro Bills during the quarter and the first Bank of England Euro Bills were auctioned on 13 April. In total, 300mn of six-month Bills were issued in each of the three months during the quarter, so that the total nominal amount of Bank of England Euro Bills outstanding with the public stood at 900mn at the end of June. The proceeds of Bank of England Euro Bills will be used by the Bank to finance the provision of intra-day liquidity, on a secured basis, to participants in CHAPS euro, as part of the arrangements for TARGET. 15. 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.
No intervention operations were undertaken during the quarter to end-June.
TABLE 1: TRANSACTIONS USD mn at Parity Rates
BANK OF ENGLAND USD mn at Current Rates
TABLE 2: BREAKDOWN OF ASSETS AND LIABILITIES AT END JUNE 1999 EEA USD mn at Parity Rates
BANK OF ENGLAND USD mn at Current Rates
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-June these comprised three US dollar bonds (two fixed-rate and one floating-rate) totalling $ 7 bn; two Euro Notes, one ECU Note and an ECU bond totalling 7.5 bn ($8 bn equivalent); and 2.6 bn ($ 2.8 bn equivalent) of 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 1999 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.
- 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 1999 is US$ 209.59 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 the overall change: - There were repayments of $ 21 mn of public sector borrowing for which HMG has provided an exchange rate guarantee under the Exchange Cover Scheme (ECS); - There were repayments of $ 1 mn of HMG debt assigned from the public sector; - Capital repayments of HMG Euro and ECU Treasury Bills maturing exceeded receipts from those issued by $949mn; - Receipts from the issue of HMG's 2002 Euro Note totalled $538 mn. 7. The underlying change is the result of a variety of transactions, both debits and credits, including, for example, transactions for Government departments, transactions with other central banks, and interest receipts and payments. For these reasons, the underlying change should not be taken as an indication of market intervention.
Notes to the Bank of England Tables 1. These tables have been compiled on the basis of the Bank of England's accounting policies. In particular the following should be noted: - Assets and liabilities in currencies other than US$ 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. 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. 1 See Note 6 to the EEA Tables.
3 Includes residual balances denominated in the predecessor currencies of the euro.
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