The Bank of Latvia » For Media » Publications » Monetary Review » 2001 » Quarter I » Foreign Reserves, the Foreign Exchange Market and Exchange Rates
Foreign Reserves, the Foreign Exchange Market and Exchange Rates
At the outset of January, the Bank of Latvia intervened in the market by selling foreign currencies (the net sales totalled 4.7 million lats), and later in the quarter, it conducted only currency swaps. The currency swap balance increased by 23.1 million lats in the first quarter, mainly due to long-term transactions. The amount allotted in tenders of currency swaps totalled 103.4 million lats. Of this amount, 77.4 million lats was short-term currency swaps (a quarter-on-quarter decrease of 19.8%) and 26.0 million lats was long-term currency swaps (a quarter-on-quarter decrease of 13.3%). The weighted average interest rate was 6.1% for short-term currency swaps (5.1% in the previous quarter) and 6.6% for long-term currency swaps. Banks' demand in tenders of currency swaps was higher in February, when their liquidity was lower. (In February, 42.1 million lats or 40.7% of the quarterly total were allotted.) In March, the amount allotted in tenders of currency swaps exceeded that repaid under currency swap arrangements. At the end of March, currency swaps outstanding totalled 132.9 million lats.
In the first quarter, the amount allotted in currency swap tenders was larger than both the amount repaid under currency swap arrangements and the amount of foreign currencies sold in open market operations; and therefore, the Bank of Latvia's net foreign assets increased by 3.4% (to 558.9 million lats). The backing of the national currency with the Bank's net foreign assets ranged between 85% and 104% in the first quarter (see Chart 18), and was 103.1% at the end of March.
In the global foreign exchange market, growing concern regarding economic growth in Europe and Japan accelerated the demand for US government bonds, which led to the strengthening of the US dollar. In view of slowing economic growth, the Federal Reserve System lowered the federal funds rate. Likewise, the Bank of England lowered official interest rates in response to the country's deteriorating financial indicators. The European Central Bank, however, did not follow the trend and kept its key interest rates unchanged, considering this step as inappropriate in conditions of inflationary pressures and higher expected inflation in the euro area. In the first quarter, the euro fluctuated vis-a-vis the US dollar within a range of 0.96-0.88, reaching its low at the end of March. Given projections about a decrease in Japan's GDP, market participants reduced their investment in Japanese securities in March. As a result, the Japanese yen weakened, falling to its low of two years at the end of March.
Chart 18
(in millions of lats)
Net foreign assets of the Bank of Latvia
Monetary base
The US dollar appreciated against the lats by 2.9% (for Bank of Latvia exchange rates for the US dollar and the euro, see Chart 19). At the same time, the euro, the British pound and the Japanese yen depreciated by 1.9%, 1.2% and 3.7%, respectively.
Chart 19
Exchange Rates of the US Dollar and the Euro Set by the Bank of Latvia(LVL vs foreign currency)
Exchange rate of the US dollar
Exchange rate of the euro
In the first quarter, the value of Latvian banks' transactions in the foreign exchange market rose by 19.1% over the previous quarter's level (to 24.0 billion lats). Transactions were mainly made in US dollars (54.2% of all transactions; 55.4% in the fourth quarter). Compared with the previous quarter, the share of transactions in euro expanded (from 21.0% to 24.1%), while that of transactions in Russian rubles contracted (from 12.5% to 9.2%).
