Annual Report 2004

The Eurosystem Secures Price Stability
Central Bank Gold Reserves With market participants paying close attention
to the issue of the sustainability of exter-
Tons
nal imbalances, reports about the enlarge-
14,000
ment of the twin deficit — the shortfalls on
12,000
the U.S. current account and the budget —
also acted as a damper on the dollarÕs value.
10,000
Yet until the late summer, the data signaled
8,000
that net U.S. liabilities did not represent a
6,000
major financing burden. Expected and actual
interest rate hikes by the U.S. Federal Reserve
4,000
System secured the attractiveness of the U.S.
2,000
markets for investment compared with other
financial centers.
0
U.S.A. Euro area Austria
Source: IMF statistics, BIS.
1 Even when private sector
capital flows began to shrink as investors were
reassessing the profitability of holding dollardenominated
investments, the principal Asian
monetary authorities still hoarded substantial
amounts of U.S. dollars in an effort to uphold their currenciesÕ parities to the U.S. dollar, thus
financing the U.S.A. 2 The rapid slide in the value of the U.S. dollar against the euro in the fourth
quarter of 2004 was set off above all by expectations that U.S. business activity was letting up, as
reflected by flagging industrial output, disappointing labor market data and deteriorating consumer
confidence. Moreover, the persistently high oil price stoked fears that the economy would
suffer.
New Central Bank Gold Agreement
The gold price broadly mirrored the USD/EUR exchange rate changes in 2004, bottoming out on
May 5, 2004, at around USD 372 per fine ounce and then rising gradually to about USD 457 per
fine ounce by the end of November.
The OeNB has been able to pursue a profitable, active gold policy, using e.g. gold leasing
transactions within the framework of the Central Bank Gold Agreement. On March 8, 2004,
15 European central banks issued a joint statement on gold by which they renewed the gold
agreement that expired on September 26, 2004, for another five years. The Bank of England
left the agreement whereas the Bank of Greece joined. The gold sales already decided and to
be decided by the undersigned institutions will be achieved through a concerted program of sales
over a period of five years. Annual sales will not exceed 500 tons, and total sales over this period
will not exceed 2,500 tons (previously: 2,000 tons). The participating central banks also agreed
that the total amount of their gold leasings and the total amount of their use of gold futures
and options would not exceed the amounts prevailing at the date of the signature of the previous
agreement.
1 The Federal Reserve System raised the federal funds target rate step by step from 1.00% to 2.25% in the course of 2004
(measures taken at the Federal Open Market Committee meetings of June 30, August 10, September 21, November 10
and December 14). Market players had anticipated each of the 25 basis point hikes months in advance, and each move
was discounted in the yield curves.
2 According to IMF statistics, AsiaÕs net currency reserves (excluding gold) alone widened from some USD 1.500 trillion to
USD 1.787 trillion from the beginning of 2004 to November 2004. In the meantime, these countriesÕ foreign exchange
reserves have attained such a large volume that even minor portfolio shifts have an impact on the exchange rate.
26 ×
Annual Report 2004