Q&A: Intervention;Central Banks Have Many Ways To Influence Value of Currencies
Central banks in several industrial countries recently have been buying billions of dollars worth of U.S. currency to prop up the dollar's value. Such activity can produce large profits or large losses for the government agencies involved. In this country, the Federal Reserve and the Treasury Department normally share the intervention burden equally, with the Fed conducting the actual sale and purchase of currencies.</br></br>When a central bank sells a foreign currency and buys some of its own, where does it get the foreign currency?</br></br>Usually the major central banks have large amounts of other currencies on hand. For instance, at the end of 1986, the Fed had $9.5 billion worth of foreign currencies, almost entirely West German marks, Japanese yen and Swiss francs.</br></br>In addition, as of the end of October, the Fed had agreements with other central banks for so-called currency swaps totaling $30.1 billion.</br></br>Under a swap agreement, the Fed can borrow up to the agreed amount of the other country's currency, usually for a temporary period, although some swap borrowings have remained outstanding for more than a year. The Fed can borrow up to $6 billion worth of West German marks and $5 billion worth of Japanese yen under these arrangements.