Currency trading hits $4 trillion

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The volume of currency trading around the world has reached $4 trillion a day, fueled by investors from wealthier countries looking to diversify beyond their home markets in times of economic turmoil.

The $4 trillion mark represents a 20% gain from $3.3 trillion in 2007, the last time global currency markets were polled, according to the Bank for International Settlements. Although the survey revealed continued growth in currency trading, it reflected a slowdown in market growth from the previous survey, when trading volumes soared 69% from 1.9 trillion. dollars in 2004.

The BIS survey, conducted every three years in April, this time provides a snapshot of the currency market at the height of the European debt crisis and at a time when lightning-fast computer models inflated trading volumes. transactions.

The debt crisis likely boosted euro trading volumes in the latest survey. But the continued increase in trade reflects the increased globalization of investment. As the major developed economies of the United States, Europe and Japan struggle, investors are looking to other markets for returns and generating more currency trading in the process.

The survey showed how investors are looking for faster growing economies and big commodity producers. The volume of trade between the US dollar and the Australian dollar increased by 35% compared to 2007, and the volume with the Canadian dollar increased by 44%. Trade also jumped for the Indian rupee, Chinese yuan and Brazilian real. In contrast, trading of the US dollar against the British pound, a mainstay of currency markets, fell 6%. Exchanges of the euro against the dollar increased by 23%.

“There’s been a shift in the overall investor dynamic,” says Jeff Feig, managing director of Citigroup’s foreign exchange department. “There are more and more investors, especially in the United States, who are investing internationally.”

Overall, the US dollar remained the dominant global currency. It represented 84.9% of transactions against 85.6% in 2007. The share of the euro rose from 37% to 39.1%. Number of shares data adds up to 200%, to reflect the fact that there are two currencies in each transaction.

The foreign exchange market is actually a network of banking brokers and electronic trading systems. At its core are investors or corporations that need to convert one currency to another, either by buying or selling a stock or bond from another country, or by bringing home profits made abroad. . For example, whenever an American investor buys a Japanese stock or a German company buys coins from a Korean supplier, a foreign exchange transaction occurs.

Banks are also major users of foreign exchange markets to convert the cash they borrow from foreign investors. Mutual fund managers overseeing foreign equity portfolios may use currency derivatives to offset the impact of exchange rate fluctuations on these investments. And finally, there are speculators, such as hedge funds and mutual funds, who bet on the rise or fall of individual currencies.

The foreign exchange market is by far the largest financial market in the world. It dwarfs U.S. stock market trading, which in April averaged about $134 billion a day, up from a daily average of $148 billion in 2007, according to data compiled by the Securities Industry and Financial Markets Association. Even trade in US Treasuries, among the largest markets in the world, averaged $456 billion a day in April, compared with an average of $570 billion for all of 2007.

Today, retail investors are increasing their exposure to foreign currencies. They pile into mutual funds that make currency betting a core part of their strategy. More broadly, U.S. mutual funds that invest overseas took in $42 billion in the past year, according to Morningstar Inc.

Additionally, exchange-traded mutual funds, whose stocks trade like stocks, make forex markets more accessible to retail investors. There are now 44 currency ETFs, up from 16 in April 2007, according to Morningstar. In 2004, there was only one.

Currency trading usually involves placing bets with borrowed money. This worries regulators about the ability of individual investors to manage large amounts of leverage, although action has been limited so far.

On Monday, federal regulators backed away from a plan to impose tougher limits on how much individual investors who trade forex can borrow.

Currently, investors can borrow $100 for every dollar invested. The Commodity Futures Trading Commission, which regulates currency trading in the United States, attempted to reduce this amount to $10.

But after a flurry of protests from brokers and individuals, he settled on $50 for every dollar invested, which is the amount of borrowing many big brokers currently allow.

money pit

Daily turnover in the foreign exchange markets

Kevin Rodgers, global head of currency derivatives at Deutsche Bank in London, says funds of all kinds – hedge funds, mutual funds and sovereign wealth funds – see currency markets as a separate asset class and not just as a means of making an investment priced in another currency. This, he says, reflects a broader search for diversification, which has also led to increased interest in commodities and other investments that don’t behave like stocks or bonds.

Along with hedge funds and other more active investors, banks that traditionally acted as intermediaries in the foreign exchange markets are responsible for a smaller portion of trading volume.

Trade between “non-dealers”, which includes hedge funds and mutual funds, rose 42% to $1.9 trillion a day, the BIS said. Trade between bank brokers grew more slowly, by 11%, to $1.5 trillion.

The shift in currency trading towards these investors is evident in the significant movement of the yen recently. Historically, the currencies of countries with high growth rates and high interest rates have tended to be strong, driven by trade flows and the attractiveness of high rates for investors. Japan has none of these factors, but the yen is at a 15-year high, largely because investors view it as a safe haven from global financial turmoil.

Some of the increase in brokerless trading likely reflects the growing importance in recent years of computerized trading models widely known as algorithms. Similar to their stock trading, these patterns make a large number of very short-term bets, adding significantly to volume, but generally not influencing the general direction of exchange rates.

Write to Tom Lauricella at [email protected] and Dave Kansas at [email protected]

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