Currency Trading Reaches $4 Trillion a Day, BIS Says (Update2)
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By Lukanyo Mnyanda and Yoshiaki Nohara
Sept. 1 (Bloomberg) -- Foreign-exchange trading rose to $4 trillion a day on average even as growth in the market slowed in the three years through April, a Bank for International Settlements survey showed.
Trading increased 20 percent, down from a 72 percent pace in the three years to 2007, according to the poll. Wider price swings caused by the credit crisis cut the appetite for risk versus the previous period, which was fueled by “low levels of financial market volatility and of risk aversion, and expansion in the activity of hedge funds,” the Basel, Switzerland-based BIS said today. The survey is released every three years.
The U.S. dollar’s share of foreign-exchange trades shrank, while Asia-Pacific currencies accounted for 35.9 percent of average daily trading. That’s the most since the BIS started compiling the surveys in 1998, up from 33 percent in 2007, and also the first increase since the 2001 report.
Implied volatility on options for major exchange rates averaged 12.25 percent in the three years through April 1, compared with about 9 percent between April 2004 and the end of March 2007, according to a JPMorgan Chase & Co. measure that tracks the dollar against the euro and the currencies of Japan, Australia, Canada, Switzerland, and the U.K. The volatility index, based on three-month options, surged to 26.6 percent in October 2008 as Lehman Brothers Holdings Inc. collapsed.
“Since the crisis it’s just been complete chaos, and volatility has gone to extreme levels from all-time lows pre- crisis,” said Kevin Rodgers, London-based global head of foreign-exchange derivatives at Deutsche Bank AG, the world’s largest currency trader. “Though it has come off, it remains historically high. The market is a very much jumpier, less- liquid place than it was pre-crisis.”
Financial Turmoil
The BIS was formed in 1930 and acts as a central bank for the world’s monetary authorities. Its Central Bank Survey of Foreign Exchange and Derivatives Market Activity is based on data from 53 institutions.
The single European currency surged to a record against the dollar in 2008 and then plunged in the wake of Lehman’s failure. The euro recovered through most of 2009 before sliding again this year as Greece’s budget crisis triggered speculation that monetary union may not survive.
In August, the yen jumped to a 15-year high against the dollar, while the Swiss franc soared to a record against the euro as investors sought havens amid deepening pessimism about the global economy.
Britain maintained its position as the biggest global foreign-exchange hub, with U.K.-based banks increasing their share of the market to 36.7 percent from 34.6 percent in 2007. The U.S. had an 18 percent share, followed by Japan, Singapore, Switzerland, Hong Kong and Australia.
Dollar Share Shrinks
Some 85 percent of currency trades in the three-year period involved the dollar, down from a 90 percent peak in the BIS’s 2001 survey. Europe’s single currency increased its portion by 2 percentage points to 39 percent, while emerging-market currencies also gained market share, led by the Turkish lira and the Korean won.
“People like to trade in markets where there’s transparency and liquidity, but where they also expect to get some sort of value,” said Alan Bozian, chief executive officer of CLS Bank, the New York-based operator of the largest currency-settlement system. “Because interest rates have been so low in the developed currencies,” and governments have used so-called quantitative easing to boost the money supply, “that allows the volatility that used to take place there to be transferred.”
Currency-trading growth over the past three years was paced by a 48 percent jump in so-called spot transactions, where trades are settled in cash almost immediately, as opposed to transactions for future delivery.
U.K. Turnover
Spot trading accounted for 37 percent of total foreign- exchange turnover, the report said. Transactions involving central banks, hedge funds, pension funds, mutual funds and insurance companies rose by 42 percent to $1.9 trillion, according to the report.
Average daily turnover in the U.K. rose 25 percent to $1.85 trillion, the Bank of England said in a separate statement. The increase was driven by a 108 percent surge in spot transactions, which account for 38 percent of turnover.
Currency trading in Japan climbed by 26 percent on average in April compared with the same month of 2007, the Bank of Japan said. Average daily foreign-exchange transactions in Japan increased to $301.3 billion in April, up from $238.4 billion in the previous survey, the bank said in Tokyo.
Singapore, Asia’s biggest foreign-exchange center after Tokyo, had average daily turnover of $266 billion in April, compared with $242 billion previously, the Monetary Authority of Singapore said in a statement.
Aussie Dollar
Australia’s foreign-exchange market has continued to expand, with the Australian dollar now the fifth most-traded currency, according to the Reserve Bank of Australia.
“Investors are beginning to see currencies as assets, like commodities and stocks,” said Kuniyuki Hirai, manager of foreign-exchange trading at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan’s largest lender. “I expect foreign-exchange trading to continue to increase in Asia and other commodity-rich places, where rapid growth draws investor attention.”
To contact the reporters on this story: Lukanyo Mnyanda in London at [email protected]; Yoshiaki Nohara in Tokyo at [email protected].
Last Updated: September 1, 2010 05:00 EDT |