U.S. monetary authorities did not intervene in foreign exchange markets in the second quarter as an improving global economic outlook pressured the U.S. dollar, the Federal Reserve Bank of New York said on Thursday.
The dollar's trade-weighted exchange value fell 6.6 percent in the three months from April to June as measured by the Federal Reserve Board's major currencies index, according to the latest quarterly report from the New York Fed.
During this period, the dollar fell 5.6 percent against the euro and 2.6 percent versus the Japanese yen. The greenback also dropped sharply against commodity-linked currencies such as the Brazilian real, South African rand, and Australian and New Zealand dollars.
Throughout April and May, the dollar generally depreciated against most major and emerging market currencies, as improved sentiment toward the global economic outlook and international financial system prompted many investors to reallocate capital to overseas asset markets, the report said.
These moves contrasted noticeably with those of the previous two quarters, the Fed said, when investor risk appetite had fallen to historically low levels, which prompted safe-haven flows into dollar- and yen-denominated assets.
U.S. monetary authorities did not intervene during the quarter. The current value of the U.S. Treasury's Exchange Stabilization Fund totaled $24.4 billion, while the Fed's System Open Market Account holdings of foreign-currency-denominated assets stood at $141.2 billion.
In contrast, sharp gains in many emerging market currencies prompted their countries' central banks to resume intervention, the New York Fed said.
For example, Brazil, Russia, India, and South Korea all reported reserves increasing between $5 billion and $26 billion during the quarter, according to the report. The Fed's custody holding data also indicated that holdings of U.S. assets by foreign official accounts had further increased.
This trend of reserve accumulation contrasted with that of the previous two quarters, when capital outflows had led many prominent emerging market central banks to draw down on their foreign reserve holdings in an effort to support their domestic currencies.
Policymakers in major economies also stepped up rhetoric on the impact of currency strength on their economic recoveries, the report said, citing June policy statements from the Bank of Canada and the Reserve Bank of New Zealand, as well as minutes from the Bank of England's June meeting.
On occasion, market participants reported that the Swiss National Bank may have acted to stem the pace of Swiss franc appreciation. However, the SNB did not report intervention activity during the second quarter, the Fed report noted.
During the period, the Fed also announced new foreign currency swap line facilities with several major central banks to help boost liquidity. The Fed said these foreign currency swap lines were not drawn upon in the second quarter.
Despite signs of improvement, many market participants remained cautious, the Fed said, as they worried that rising unemployment, weak consumer spending, and growing fiscal burdens in many majors economies could still dampen economic activity and weigh on financial markets.
The New York Fed said this was partly evidenced by the stabilization in the dollar versus major currencies in June .DXY.