The Federal Reserve System of the USA | SigmaForex

The Federal Reserve System of the USA

Like the other central banks, the Federal Reserve of the USA affects the foreign exchange markets in three general areas:

* the discount rate;

* the money market instruments;

* foreign exchange operations.

For the foreign exchange operations most significant are repurchase agreements to sell the same security back at the same price at a predetermined date in the future (usually within 15 days), and at a specific rate of interest. This arrangement amounts to a temporary injection of reserves into the banking system. The impact on the foreign exchange market is that the dollar should weaken.

The repurchase agreements may be either customer repos or system repos. Matched sale-purchase agreements are just the opposite of repurchase agreements.

When executing a matched sale-purchase agreement, the Fed sells a security for immediate delivery to a dealer or a foreign central bank, with the agreement to buy back the same security at the same price at a predetermined time in the future (generally within 7 days).

This arrangement amounts to a temporary drain of reserves. The impact on the foreign exchange market is that the dollar should strengthen.