Global crisis drives investors to forex markets

The global economic crisis has driven investors to the forex markets where turnover has soared to a staggering four trillion dollars a day — equal to what Germany produces in a year.

Overall, daily global foreign exchange market turnover grew 20 percent to some four trillion dollars by April 2010 from 3.3 trillion dollars three years earlier, according to a Bank of International Settlements’ report.

Britain maintained its leading position as the world’s largest foreign exchange centre with 36.7 percent of the total trade, benefiting from its strategic position astride the global trading day.

The United States was second with 18 percent and then Japan with six percent.

The sums are almost beyond belief but reflect how global investors have come to see the forex markets as an increasingly sound option when the economic crisis scuttled other asset classes, most notably stocks and for a while, commodities.

The increase in the business — where players make small incremental gains or losses on huge turnover — has been largely due to the emergence of other investors beyond the traditional commercial banks, BIS said in its report.

These ‘other financial institutions’ include non-reporting, that is wholly private banks, hedge funds, pension funds, mutual funds, insurance companies and central banks, among others, it said.

At the same time, some countries have amassed untold amounts of foreign exchange as the steady expansion of global trade has unfolded.

Emerging giant China currently holds forex reserves of around 2.45 trillion dollars, nearly 30 percent of the global total of 8.09 trillion dollars at the end of 2009, according to International Monetary Fund figures.

The new players have been quick to make their mark, analysts said.

“Given the remarkable growth in … forex reserves over the course of the past eight years … it seems reasonable to suppose that emerging market central banks were a significant driver of this market growth,” said Simon Derrick of asset management group BNY Mellon.

As the pot has grown, investors have also begun to look beyond the dollar, which although still the dominant trade is seeing its position eroded by the European single currency and Japan’s yen, which has attracted a lot of interest recently.

The BIS report showed that the dollar accounted for 84.9 percent of all trades in April, down from 90 percent in 2001, while the euro rose two percentage points to 39 percent and the yen was also up two percentage points to 19 percent.

Because currency trades typically involve two currencies, the total percentage for the market is given as out of 200 percent rather than 100 percent.

Emerging market currencies also gained popularity, with the market share of 23 currencies growing to 14 percent in April 2010 from 12.3 percent in the previous survey in 2007.

“The most significant increases were seen for the Turkish lira and the Korean won, followed by the Brazilian real and the Singapore dollar,” the BIS said.

The Australian and Canadian dollars saw their shares increase by one percentage point each to 7.6 percent and 5.3 percent, buoyed by their status as ‘commodity currencies’ benefiting from soaring demand for raw materials from China and other emerging nations.

For Michael Hewson of CMC Markets in London, these currencies are only likely to attract more interest as the China growth story, joined by Brazil and India, looks set to dominate the headlines for years to come.

China’s own currency the yuan is slowly being internationalised by Beijing but its future role is unclear while the government continues to keep it on a tight leash, much to the chagrin of its trading partners who claim to be put at a disadvantage as a result.