US, UK and Australia win in global boom

In the UK, which retains its position as the leading centre for FX trading, with 31.3% of global turnover in 2004, average daily turnover was up 49% to $753 billion in this year’s BIS survey. The largest percentage growth between 2001 and 2004 was in outright forwards, which saw 94% growth, followed by spot (47%) and swaps (43%).

The top banks in London also tightened their grip on the market, with a modest increase in market share since 2001. The top 10 institutions with the highest level of turnover in the UK increased market share from 59% in 2001 to 61% in 2004 – while the top 20’s share inched up from 79% to 80%.

In the US, average daily FX turnover was up a massive 82% from the previous survey, rising to $461 billion in April 2004 from $254 billion in 2001. In common with the global survey, the US market had also seen a contraction in the industry in 2001, as a result of the introduction of the euro, the growth of electronic broking, consolidation among dealers and a slowdown in international trade. But in 2004, the Federal Reserve attributed the return of soaring FX volumes to a resumption of growth in cross-border trade and investing in the US. "In particular, the renewed growth in trading may in part reflect increased activity by highly leveraged investors such as hedge funds and commodity trading advisers," said the Fed.

Investment and speculation flows may have found their way into exchange-traded FX – not covered by the BIS’s survey – but over-the-counter FX turnover was certainly boosted by increased hedging, it added. "Corporations and portfolio managers were widely perceived as taking more active approaches to managing exchange rate risks," said the US central bank. "Both businesses and investors reportedly made greater use of currency overlay managers with the objective of enhancing returns and reducing risk.

The Reserve Bank of Australia pointed to a pick-up in international demand for A$-denominated assets to explain its 56% increase in forex turnover between 2001 and 2004. Spot transactions saw a particular surge, up 94% over the same period, while outright forwards and foreign exchange swaps both increased by 43%.

The central bank’s report also stated that transactions between resident dealers and overseas banks now account for more than three quarters of all turnover and increased by 84%.

Rick Lloyd, head of G10 trading in Asia, at ABN Amro in Sydney, said that the increase may also be attributable to a growth in the number of foreign banks – such as his institution – that run Asian G7 business from Australia. The Australian dollar has also benefited from its status as a commodity-linked currency, as a result of high oil prices boosting commodity prices, said Allison Montgomery, senior currency strategist at Westpac in Sydney.