CONFIDENTIAL
THE EXCHANGE FUND
REPORT FOR THE YEAR ENDED 31 DECEMBER 1991
1.
The Fund's Balance Sheet as at 31 December 1991 and its
Income and Expenditure Account for the year are attached.
FOREIGN EXCHANGE MARKETS
2.
The US dollar recovered from its depressed state at the
end of 1990 and strengthened dramatically against most major
currencies in the early part of the year. Apart from some temporary
set-backs caused by threats of central bank intervention and
releases of poor US economic data, the dollar relentlessly pursued
its upward trend on the back of the Gulf victory and hopes of an
early economic recovery in the US. This lasted until July when
intervention by the Federal Reserve Bank, the
co-ordinated
Bundesbank, and a number of other European central banks surprised
the foreign exchange markets and brought about a big correction in
US dollar exchange rates.
3.
Thereafter, apart from a temporary sharp rise caused by
the Soviet coup in the middle of August, the dollar declined against
the European currencies for the rest of the year. The decline was
mainly due to substantial interest rate differentials and prospects
of further FED easing and Bundesbank rate hikes. Sterling, too
appreciated against the US dollar, but was weak within the ERM as
interest rates in the UK fell and there were worries over the coming
general election. In the meantime, the yen was also appreciating
against the dollar on account of Japan's widening trade surpluses
with the US and other countries.
CONFIDENTIAL