Currency-Trading Growth Slowed Amid Crisis, BIS Says

Sept. 1 (Bloomberg) -- Growth in foreign-exchange trading slowed in the three years through April as heightened price swings after the credit markets seized up lowered the appetite for risk, a Bank for International Settlements survey showed.

Trading increased 20 percent to $4 trillion a day on average, the BIS said in the poll, which is released every three years. Growth lagged the 72 percent, three-year expansion recorded in the last survey, published in 2007, which was partly fueled by “low levels of financial market volatility and of risk aversion, and expansion in the activity of hedge funds,” the Basel, Switzerland-based BIS said today.

Asia-Pacific currencies accounted for 35.9 percent of average daily foreign-exchange trading, the most since the Basel, Switzerland-based BIS started compiling the surveys in 1998, up from 33 percent in 2007. That is also the first increase since the 2001 figures, the BIS said today.

Implied volatility on options for major exchange rates averaged 12.25 percent in the three years through April 1, compared with about 9 percent between April 2004 and the end of March 2007, according to a JPMorgan Chase & Co. measure that tracks the dollar against the euro and the currencies of Japan, Australia, Canada, Switzerland, and the U.K. The volatility index, based on three-month options, surged to 26.6 percent in October 2008 as Lehman Brothers Holdings Inc. collapsed.

“Since the crisis it’s just been complete chaos, and volatility has gone to extreme levels from all-time lows pre- crisis,” said Kevin Rodgers, London-based global head of foreign-exchange derivatives at Deutsche Bank AG, the world’s largest currency trader. “Though it has come off, it remains historically high. The market is a very much jumpier, less- liquid place than it was pre-crisis.”

Financial Turmoil

The BIS was formed in 1930 and acts as a central bank for the world’s monetary authorities. Its Central Bank Survey of Foreign Exchange and Derivatives Market Activity is based on data from 53 institutions.

The single European currency surged to a record against the dollar in 2008 and then plunged in the wake of Lehman’s failure. The euro recovered through most of 2009 before sliding again this year as Greece’s budget crisis triggered speculation that monetary union may not survive.

This month, the yen has jumped to a 15-year high against the dollar, while the Swiss franc has soared to a record against the euro as investors sought havens amid deepening pessimism about the global economy.

Britain maintained its position as the biggest global foreign-exchange hub, with U.K.-based banks increasing their share of the market to 36.7 percent from 34.6 percent in 2007. The U.S. had an 18 percent share, followed by Japan, Singapore, Switzerland, Hong Kong and Australia.

Dollar’s Share

The dollar was used in a smaller proportion of foreign- exchange transactions. Some 85 percent of currency trades in the three-year period involved the dollar, down from a 90 percent peak in the BIS’s 2001 survey. Europe’s single currency increased its portion by 2 percentage points to 39 percent, while emerging-market currencies also gained market share, led by the Turkish lira and the Korean won.

Currency-trading growth over the past three years was paced by a 48 percent jump in so-called spot transactions, where trades are settled in cash almost immediately, as opposed to transactions for future delivery.

U.K. Turnover

Spot trading accounted for 37 percent of total foreign- exchange turnover, the report said. Transactions involving central banks, hedge funds, pension funds, mutual funds and insurance companies rose by 42 percent to $1.9 trillion, according to the report.

Average daily turnover in the U.K. rose 25 percent to $1.85 trillion, the Bank of England said in a separate statement. The increase was driven by a 108 percent surge in spot transactions, which account for 38 percent of turnover.

Currency trading in Japan climbed by 26 percent on average in April compared with the same month of 2007, the Bank of Japan said. Average daily foreign-exchange transactions in Japan increased to $301.3 billion in April, up from $238.4 billion in the previous survey, the bank said in Tokyo.

Singapore, the Asia’s biggest foreign-exchange center after Tokyo, had average daily turnover of $266 billion in April, compared with $242 billion previously, the Monetary Authority of Singapore said in a statement.

Aussie Dollar

Australia’s foreign-exchange market has continued to expand, with the Australian dollar now the fifth most-traded currency, according to the Reserve Bank of Australia.

“Investors are beginning to see currencies as assets, like commodities and stocks,” said Kuniyuki Hirai, manager of foreign-exchange trading at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan’s largest lender. “I expect foreign-exchange trading to continue to increase in Asia and other commodity-rich places, where rapid growth draws investor attention.”