Banking’s soldiers of fortune Foreign exchange traders on front line of currency war

By Tom Abate –
San Francisco is still dark and quiet on Friday morning as traders working the currency desk at Wells Fargo stare at their computers. They are waiting for the number that will send the dollar shooting up or down against the euro and the yen — specifically, how many jobs U.S. employers create in November.
“The market is expecting 200,000,” says Simon Fowles, the 38-year-old British native who directs the half-dozen or so currency traders who start each day in the wee hours so they can overlap with their counterparts in Zurich and London.

Alongside Fowles, 40-year-old Eric Blanc occupies the hot seat. The French-born currency specialist handles dollar-euro conversions, the world’s most popular transaction, undoubtedly the focus of traders at the more than 1, 100 similar currency rooms worldwide. They’re all intent on the U.S. jobs number due to be reported by the Labor Department in Washington.
At the Wells office in San Francisco, other traders watch the yen, British pound, Swiss franc, Canadian dollar and other currencies whose values vis-a-vis the dollar hinge, at least temporarily, on the U.S. jobs report.
In the calm before the news, Fowles punches orders into a numeric keypad, but erases them instead of sending them out over the electronic network that links trading rooms around the globe. “It helps to have fingers like a Nintendo player,” he quips.
Then the number flashes — 112,000. It’s a disappointment that causes the dollar — hovering around $1.33 to the euro prior to the news — to tumble to $1.332, then to $1.335, reverse course to $1.3323, then fall again to $1.338, in a wild gyration played out in seconds on one of the facing computer screens.
Fowles, who’s giving blow-by-blow coverage instead of trading, explains that, on a 5 million euro exchange, the difference between $1.33 and $1.3301 is worth about $500 dollars. That means the value of a 5 million euro exchange has fluctuated inside a $40,000 range in about the time it would take to smear cream cheese on a bagel.
Suddenly, Blanc jumps up and smacks his hands with pleasure. “I put out a price that was way out there and got it,” he exclaims. Blanc was trading a large currency holding for a couple of unidentified Wells customers.
This is the global currency market, where money, options and futures worth an estimated $1.9 trillion are traded every day between specialists whose only interaction is the mouse click that accepts an electronic trade.
It’s a market that has exploded in recent years, thanks to surging trade and ever-greater globalization of financial markets. The stakes are high. A few seconds of hesitation or a bit of over-eagerness can mean hundreds of thousands of dollars, or even millions, won or lost.
Currency trading volume these days is roughly triple average daily activity in 1989, according to the Bank for International Settlements in Switzerland. At Wells, the action doesn’t stop. Three shifts of traders gaze into screens 24 hours a day.
On this vast yet decentralized market, the less-than-almighty dollar has been taking a beating since 2002, falling about 15 percent against a broad basket of currencies. It has plunged even more against the euro, which cost $0. 86 in 2002 — a drop of about 35 percent.
“Money is a commodity,” said Peter Connolly, executive vice president for Wells’ San Francisco-based international group. “As long as people want to buy, it goes up. As long as people want to sell it, it’ll go down.”
Connolly, a former currency trader, boiled the dollar’s decline down to the two basic factors that rule global foreign exchange markets — trade and interest rates. For years the United States has been running big trade deficits relative to other nations. In recent years, its interest rates have been relatively low. Both of these factors tend to cheapen the value of the dollar relative to other currencies.
The currency market as we know it today is a relatively recent phenomenon. At the end of World War II, the value of leading currencies was essentially fixed by an agreement known as Bretton Woods. In the early 1970s, then- President Richard Nixon broke away from this agreement by allowing the dollar to float freely. That forced other nations to do the same and gave rise to the modern foreign exchange, or forex, market.
At first, the forex market consisted of a network of large banks whose trading desks were staffed by specialists on whose desks were arrayed a half- dozen phones that served as hot lines to other trading desks. Paul Kimball, 53, a veteran currency trader and foreign exchange adviser to investment banking giant Morgan Stanley, recalls that after a big news event, like the assassination of former Egyptian President Anwar Sadat in 1981, buyers would practically vanish, forcing traders trying to unload large blocks of currency to dial up banks around the world one by one to complete the transactions.
The advent of electronic trading systems in the late 1980s and early 1990s hooked more institutions into the system, improving what professionals call the liquidity of the market. In lay terms, that means that by connecting ever-larger numbers of buyers and sellers, it becomes more likely that someone, somewhere, will be willing to buy a given currency at any moment.
At Wells, Connolly explained, the growing market for foreign exchange is grounded in the growth of global trade, which generally requires currency conversion.
The desire to hedge currency risk has given rise to various types of futures contracts in which traders do not actually buy or sell currency now, but rather promise to buy it at some later time at a fixed price. Businesses try to insulate themselves from the risk that a $1 million order for widgets placed in March won’t cost them more when the bill is paid in December by routinely making such contracts for foreign currency far in advance.
On Friday, as Wells traders watched their computer screens waiting for the jobs number, the action was hot and heavy at the Chicago Mercantile Exchange, where currency futures contracts are traded just like pork bellies.
“Today we had our biggest day ever, with $40 billion in currency futures, ” said Ray McKenzie, the Chicago Merc’s director of foreign exchange marketing. Those trades represented about 300,000 contracts.
Not all forex market participants are businesses funding international operations. Investors and speculators try to make money by guessing which way the markets are moving.
“I try to anticipate where the money is going to go, why one sector of the world is hot today and anathema tomorrow,” said Yra Harris, 51, a currency strategist with Praxis Trading Co., a consulting firm in Skokie, Ill.
The size, growth and speculative nature of the foreign exchange market creates the potential for sell-offs that can throw the economies of emerging nations into turmoil, such as during the Asian currency crisis of 1997.
But currency expert Nariman Behravesh, with the Massachusetts consulting firm Global Insight, said the United States and other developed nations are unlikely to be as affected by currency swings. “(Such currency movements) usually don’t transfer into nasty economic situations in the developed world,” he said.
Global currency market at a glance
Average daily transactions: $1.88 trillion
Most traded currencies: Dollar, euro, yen, British pound
Top trading centers: United Kingdom, United States, Japan, Singapore, Germany
Source: Bank for International Settlements
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Source: San Francisco Chronicle

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