Currency Trades Soar to $3.2 Trillion a Day, BIS Says
Foreign-exchange trading rose 65 percent in the past three years to a record $3.2 trillion a day on average, led by hedge funds and foreign investors, the Bank for International Settlements said in its triennial survey.
The increase in the value of transactions from 2004 was the biggest in the survey’s 18-year history, the Basel, Switzerland- based BIS said today. Taking into account the appreciation of currencies, turnover rose 71 percent. The share of emerging market currencies climbed to 20 percent, the BIS said.
“It’s really massive and it says a lot about financial globalization,” said Stephen Jen, the London-based global head of currency research at Morgan Stanley, the second-biggest U.S. securities firm. “Trades can go up in any local market but the survey tells us that cross-border flows have shifted into a higher gear.”
Increased trading in a growing number of foreign markets, driven by an expansion in the economies of Asia, has helped triple foreign-currency turnover in the past 15 years. At the same time, assets in hedge funds, private pools of capital where managers can buy or sell any assets, have risen to a record $1.76 trillion, according to Chicago-based Hedge Fund Research Inc.
Banks hired 10 percent more employees for foreign-exchange sales last year, according to a survey by Michael Williams Associates. More than 42 percent of 440 new appointments by 20 banks in 2006 were for such sales, the London-based executive recruitment company reported in January.
Hedge Fund Transactions
Transactions involving hedge funds, pension funds, mutual funds and insurance companies rose to 40 percent, from 33 percent in 2004, said the BIS, which was formed in 1930 and acts as a central bank for the world’s monetary authorities. “Algorithmic” trades, those managed by computer programs, also spurred growth and increased the speed of trading, according to the report.
The U.S. dollar, which fell to a record low against the euro of $1.4154 today, lost market share. It was involved in about 86 percent of daily trading, down from almost 89 percent.
The falling dollar and the growing role of emerging-market currencies may have contributed to the slide in market share, according to the report. The euro accounted for 37 percent, down from 37.2 percent.
“This could be taken as yet another sign of the decline of the dollar, but I’m just not so sure,” Jen said. “As financial globalization occurs, markets should become more and more democratic.”
Yuan, Rupee
The Chinese yuan, which is regulated by the central bank, and the Indian rupee posted the fastest growth in global currency trading in the past three years as the economies of the world’s two most populous nations expanded. Average daily trade in India’s currency and related derivatives surged almost fivefold to $34 billion, from $7 billion in 2004. In China, volume grew ninefold to $9 billion.
The Australian and New Zealand dollars gained market share as they attracted so-called carry trades. The Australian dollar was involved in 6.7 percent of daily turnover, up from 5.5 percent in 2004, while the New Zealand dollar accounted for 1.9 percent, up from 1 percent.
In a carry trade, investors borrow in low-yielding economies and convert the loans into other currencies to buy higher-yielding assets elsewhere.
The Australian dollar has gained almost 16 percent against the dollar during the past 12 months while the Swiss franc, another popular currency for carry trades, has lost 5.1 percent.
China’s Influence
The U.K., Switzerland and Singapore accounted for a larger share of trades. Switzerland’s nearly doubled to 6.1 percent. The U.K. increased its lead to more than 34 percent, from about 31 percent, and Singapore’s share grew to 5.8 percent, from 5.2 percent.
Hong Kong’s portion rose to 4.4 percent from 4.2 percent, reflecting China’s growing influence in the market, the BIS said.
“It’s a geographic issue because of the time zone and the hedge-fund community,” said Simon Derrick, London-based chief currency strategist at Bank of New York Mellon Corp. “London has been a growing financial center over the last couple years. There are also natural centers that are rising in Asia and the Middle East.”
The U.K. also dominated the over-the-counter derivatives market, accounting for almost 43 percent of worldwide sales, followed by the U.S. with about 24 percent.
Expanding Derivatives
The derivatives market has expanded 71 percent since 2004, rising to $2.1 trillion a day, the BIS said. Cross-currency swaps were the fastest-growing segment, almost tripling, as traders hedged their holdings in foreign-currency bonds. Derivatives are contracts whose value is derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates.
The dollar and the euro led turnover in interest-rate derivatives trading. Their combined share still fell as derivatives linked to the Japanese yen gained, reflecting the country’s first rate increases in five years, starting in 2006.
“We’ve lived through a very benign and stable environment for the last several years,” said David Simmonds, global head of currency research at Royal Bank of Scotland Group Plc in London. “People have become more comfortable and knowledgeable about these instruments in an environment that’s been accommodative. That’s enhanced risk-taking.”
Mergers and acquisitions may also have boosted trading as companies converted currencies to fund takeovers, the report said. Takeovers jumped to about $3.4 trillion last year, from $1.9 trillion in 2004, according to data compiled by Bloomberg. Cross-border deals are $1.8 trillion so far this year.
Trading with non-financial customers rose to 17 percent from 14 percent in 2004, the BIS said.
The BIS’s Central Bank Survey of Foreign Exchange and Derivatives Market Activity is based on data from 54 of the world’s central banks and monetary authorities.