Forex Queries

In the United States, explicit authorization for foreign-exchange intervention is technically in the hands of the Treasury. The Gold Reserve Act of 1934 created an Exchange Stabilization Fund (ESF) expressly to enable he Treasury to intervene in the market when necessary to stabilize the dollar. According to that act, the ESF is under the exclusive control of the secretary of the Treasury, “subject to the approval of the President.”

          The Federal Reserve Bank of the United States is not licensed to set foreign-exchange policy. When the Treasury intervenes, however, it has to use the facility of the Fed. In particular, the purchase and sale of foreign currencies on the open market is implemented by the Federal Reserve Bank of New York. While the Fed doesn’t have explicit authority to play this game, ever since the early 1960s, when the Fed stepped in to defend the dollar and the U.S. gold reserves, the Treasury and the attorney general have issued a number of legal decisions that have given the Fed the right to proceed.

          It’s a strange system. Theoretically, the Treasury and the Fed could go their separate ways if they so desired. The Treasury could buy dollars through the Exchange Stabilization Fund while the Fed was selling dollars through the Federal Reserve Bank of New York. The Treasury secretary has to report only to the president. The chairman of the Federal Reserve, once appointed by the president and confirmed by the Senate, doesn’t have to report to anyone except his own board, the Federal Open Market Committee, and ultimately Congress.