ESF & dollar intervention

Cross ref http://awanginvest.com/?p=679

August 21, 2008 – 12:00 am

So few of us are aware of the ESF - the Exchange Stabilization Fund of the US Treasury. In fact, all major central banks or nations have a similar facility.

I thought it may be good follow up on the post touching on Shadow Statistics at:

www.tradingsuccess.com/blog/

The ESF was started in 1934 in response to perceived prior dollar manipulation by the Bank of England and others earlier in the decade.

Simply put, the ESF can deal in foreign currencies as well as in gold and “other instruments of credit and securities”, totally legally. The ESF can also serve a valid purpose in helping to stabilize the value of the dollar,too.

So, what have we on the nitty gritty details on the recent dollar intervention?

Officially, all we really know is that about $7 billion dollars has been placed and directed into something called “other foreign currency assets invested through reverse repurchase agreements” which is a fancy name for a loan.

That may be in Euro based repos, but since the classifications are not specific, we do know that governments have not always been transparent and above board about what they’re doing.

The actual timing and dollar details of the recent intervention are as follows:

  1. As of the reporting weeks ending June 13 & June 20 2008, $6.381 billion dollars were sold by the ESF in Euros (Euros were sold, dollars were bought). The ESF maintains the account balances in dollars, but the money is actually in Euros .
  2. During that first week, the value of the dollar index moved from 72.39 to 74.15 and then back to 73.43 the following week.
  3. The reporting of the ESF actions from the weeks ending June 13 & June 20 was not made public until July 14 2008.
  4. The dollar index closed at 71.87 on July 15 2008, which was the recent low.

In actual fact, the ESF intervention preceded any other significant factor to the dollar move.

Currency intervention can be done in both directions. This quote is key in understanding interventions in general: dollar holdings of foreign governments and central banks rose by $41 billion in 1986 and kept rising this year; that represents their intervention in currency markets. Hence, at the exchange rates that prevailed last year, private capital inflows to the United States were not enough to finance its current-account deficit. “Without official intervention,” Mr. Perry said, “the dollar would have fallen even further than it has.” — New York Times, 1987

As an aside about the ESF is this : 70% of its $2.8 billion initial funding in 1934 came from proceeds of F.D.R.’s confiscation of gold and its subsequent revaluation from $20 to $35/oz.

So we have to take all official releases of economic data with a pinch of salt!

ANA aka IDKIT

Ag Moderator

Related Posts