Currency Trading Surges to Record $1.9 Trillion Daily Average

By Mark Tannenbaum –
Foreign-exchange trading surged to a record daily average of $1.9 trillion this year as hedge funds and other money managers increased bets on currencies, according to the Bank for International Settlements.
The value of transactions, which is about four times the average trading each day in U.S. Treasury securities, rose 57 percent from 2001, the BIS said in its Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity.

Turnover tripled in the past 15 years and more than recovered from a drop in the three years to 2001, swelling revenue at banks including HSBC Holdings Plc, UBS AG and Citigroup Inc. Dealing between banks and other financial institutions rose to a third of the total as hedge funds bet on a slide in the dollar.
“Foreign exchange, particularly in 2003, was a terrific asset class to trade,” Benjamin Welsh, head of foreign exchange sales and trading in North America for HSBC in New York, said in an interview on Sept. 1. “People made an awful lot of money; foreign exchange has been in vogue.”
The dollar, which the BIS said was on one side of 89 percent of all transactions, weakened 15.3 percent last year and fell 9.3 percent in 2002, according to a Federal Reserve index tracking the dollar against currencies of major U.S. trading partners.
Betting Against Dollar
Wagers by speculators including hedge funds on a dollar decline against the euro reached a record in July this year, eclipsing the previous high in May 2002, according to the Commodity Futures Trading Commission in Washington.
The dollar fell to a record $1.2930 per euro on Feb. 18. A day earlier, it tumbled to $1.9140 against the British pound, the lowest since September 1992. In March, the dollar slipped to 103.40 yen, the weakest since 2000. The dollar has since recovered to $1.2330 per euro at 8 a.m. in New York and 111.40 yen.
“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” likely contributed to the increased trading, BIS said.
In the third quarter of 2001, Barclay Trading Group, Ltd., a Fairfield, Iowa firm that tracks hedge funds and commodity trading advisors, tallied a total of 65 trading programs dedicated to currencies, controlling $4.4 billion in assets. In July those totals had risen to 87 programs with $12.6 billion.
The BIS also said over-the-counter derivatives trading more than doubled in the past three years, surging 112 percent to $1.2 trillion. The figures include derivatives such as cross-currency swaps and options and all interest rate derivative contracts.
`Asset Class’
The past two years were “a foreign exchange boom,” said Jeremy Fand, senior proprietary currency trader in New York at WestLB AG and former head of currency strategy at UBS. “It will always remain an asset class now.”
The survey by the Basel, Switzerland-based BIS was conducted in April by central banks and monetary authorities in 52 nations. It covers trading in currency spot, forwards and swaps markets and will be updated in the first half of 2005.
Average daily currency trading is bigger than the $505 billion of Treasury notes that changed hands on average in the week to Sept. 15, according to New York Fed statistics. Daily transactions on the New York Stock Exchange averaged about $46 billion in August, while Nasdaq trading averaged about $11 billion, based on data from the exchanges.
Foreign-exchange turnover exceeds the International Monetary Fund’s estimates for the gross domestic product of all but three of the world’s economies: the U.S., Japan and Germany.
“The foreign exchange market has been much better this year than the conditions described in the last survey in 2001,” said Tetsuji Ogino, deputy general manager of the foreign exchange and treasury division in Tokyo at Bank of Tokyo-Mitsubishi Ltd.
Swelling Revenue
Banking revenue from foreign exchange trading also got a boost in the past three years amid the gain in transactions.
Citigroup’s trading revenue related to foreign exchange jumped from $1.1 billion in 2000 to $1.5 billion in 2001, then to about $1.8 billion each of the past two years, the company’s annual reports show. Citigroup has a 9.4 percent share of the currency market, according to Euromoney magazine.
At HSBC, foreign exchange dealing revenue rose to $1.24 billion last year, from $1.12 billion in 2001, the company’s annual report shows. UBS, which Euromoney ranks as the biggest trader in the currency market with 12.4 percent, said in its 2003 report that it derived 1.5 billion Swiss francs ($1.2 billion) from foreign exchange trading last year.
UBS, Deutsche Bank AG, Citigroup, JPMorgan Chase & Co. and HSBC — the five largest currency traders — have a combined 44.6 percent share of the market, Euromoney estimates.
Porsche’s Hedging
Trading between banks and financial customers, such as hedge funds, rose to a third from 28 percent in 2001, the BIS said. Transactions between dealers accounted for 53 percent of the total, down from 59 percent. The remaining 14 percent was between dealers and non-financial customers.
The euro-U.S. dollar exchange rate accounted for the biggest share of daily trading, at 28 percent, down from 30 percent in 2001. Dollar-yen followed with 17 percent and then dollar-British pound at 14 percent.
The dollar was involved in 89 percent of all trades, the BIS said, more than double the euro’s 37 percent share. Both were little changed since 2001. The yen factored into 20 percent of trades and the British pound 17 percent.
A falling dollar spurred companies such as carmaker Porsche AG to guard against currency fluctuations. Europe’s most profitable carmaker is hedged against swings in the U.S. currency through 2008, Chief Financial Officer Holger Haerter said in an interview on Sept. 22. It was previously hedged through 2007.
London retained its spot as the currency market’s capital, with 31 percent of total trading taking place there. The U.S. ranked second, with 19 percent, followed by Japan at 8 percent. Singapore and Germany were next with 5 percent of the total.
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