authorities have intervened only rarely since 1995. dollar intervention initiated by a foreign central bank also leaves the supply of balances at the Federal Reserve unaffected, unless the central bank changes the amount it has on deposit at the Federal Reserve. If, for example, the foreign central bank purchases dollars in the foreign exchange market and places them in its account at the Federal Reserve Bank of New York, then the supply of Federal Reserve balances available to depository institutions decreases because the dollars are transferred from the bank of the seller of dollars to the foreign central bank s account with the Federal Reserve. However, the Open Market Desk would offset this drain by buying a Treasury security or arranging a repurchase agreement to increase the supply of Federal Reserve balances to US depository institutions. Most dollar purchases by foreign central banks are used to purchase dollar securities directly, and thus they do not need to be countered by US open market operations to leave the supply of dollar balances at the Federal Reserve unchanged. Currency Resources main source of foreign currencies used in US intervention operations currently is US 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 US 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 ce...
