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Hedge fund bets boost foreign exchange turnover

Phil Newton's picture
Hiya folks An interesting snippet from the FT...
Trading on the world's foreign exchange markets has leapt to a record $1,900bn a day, driven by renewed interest in currencies as an asset class and the return of hedge funds specialising in currency bets. Turnover in currency and interest rate derivatives sold by banks also soared to new record levels, according to a three-yearly survey by the Bank for International Settlements. The rapid growth in financial market transactions - far in excess of the growth in world trade - is a sign of growing integration of global capital markets and increasingly sophisticated risk management by companies and investors. After slumping amid the introduction of the euro, which eliminated the currencies of some of the world's biggest economies, trade in foreign exchange bounced back between 2001 and 2004. The BIS said investors disappointed by equity returns and low bond yields were searching out new forms of investment, including currencies. Macro hedge funds - specialising in big currency bets - were back in business after having been eclipsed by funds betting on equities. Growing activity in Japanese interest rate options signalled that the Japanese economy was stirring back to life. But key features of the market have endured. The dollar rules supreme as the world's dominant currency, involved in 89 per cent of all currency trades. London retains its position as the world's capital for foreign exchange trading, with a stable market share of 31 per cent. The last BIS survey in 2001 had shown daily volume of $1,200bn, equivalent to almost $1,400bn at today's exchange rates. Trading in derivatives, including currency options, interest rate swaps and forward rate agreements, leapt by 76 per cent to $1,200bn a day, the BIS said, based on constant exchange rates. Volumes were well above what market watchers expected. Many predicted volumes would have risen to about $1,500bn as a result of growing interest in the market and the strong trends produced by the dollar's decline. The BIS report is considered the most authoritative on the currencies markets, which trade round the clock and across borders every day of the week. The jump in trading volumes underlined the status of foreign exchange as the biggest single market in the world. The report cited "investors' interest in foreign exchange as an asset class alternative to equity and fixed income, the more active role of asset managers and the growing importance of hedge funds" as reasons behind the growth of the market. Ian Stannard, currency strategist at BNP Paribas in London, said: "We're seeing a lot more participation by investor groups who haven't actively managed currency risk before. FX [foreign exchange] is being seen more as an asset class in its own right." The weakening of the dollar against other currencies over the past two years has provided a strong trend which has drawn new players into actively dealing in currencies. Many investment banks attributed part of the strength of their trading profits last year to the moves in foreign exchange.