Core Focus: The scale and composition of US foreign exchange reserves, the currency allocation (euros and yen), the permitted investment instruments, and the accounting treatment of foreign currency holdings.

In-Depth Notes:
The US monetary authorities’ foreign currency reserves are modest relative to the size of the US economy. The US holds roughly $38 billion of foreign currency reserves, split broadly evenly between the Treasury’s Exchange Stabilization Fund (ESF) and the Federal Reserve’s System Open Market Account (SOMA) . Around 70% of those reserves are held in euros, with the remainder invested in yen-denominated assets . The SOMA and ESF foreign currency reserves are currently held in euros and Japanese yen and are passively managed .

Currency Allocation:
The currency composition of US reserves is dominated by euros and Japanese yen. As of the end of March 2017, the euro reserves held by both the SOMA and ESF totaled $23.3 billion, while yen-denominated deposits and government securities held by the SOMA and ESF totaled $16.8 billion . The euro share of US reserves has moved around considerably over time as a consequence of basically static holdings of euros and yen and an evolving cross-rate between them . In June 2008, the US reserve portfolio comprised 63.8% euro and 36.2% yen. In June 2012, it comprised 53.9% euro and 46.1% yen, following the European sovereign debt crisis .

Permitted Investment Instruments:
The US monetary authorities invest their foreign currency reserves in a variety of instruments that yield market rates of return in their respective currencies and have a high degree of liquidity and credit quality . The Authorization for Foreign Currency Operations defines the permitted investments for the SOMA foreign currency portfolio . A significant portion of the reserves is invested on an outright basis in German, French, Dutch, and Japanese government securities . Foreign currency reserves may also be invested at the Bank for International Settlements and in facilities at other official institutions such as the Deutsche Bundesbank, the Banque de France, and the Bank of Japan . To the greatest extent practicable, the investments are split evenly between the SOMA and the ESF .

Accounting Treatment:
Foreign currency denominated investments of the Reserve Banks are revalued daily at current market exchange rates, with any translation gains or losses recognized in profit and loss . The changes in balances by source are broken down into net purchases and sales, investment earnings, realized gains/losses on sales, and unrealized gains/losses on foreign currency revaluation . This daily revaluation can lead to significant changes in the reported value of the portfolio, driven by exchange rate movements rather than active trading.