GREENWICH, Conn. (HedgeWorld.com)–A new report attributes much of the 25% volume growth in foreign exchange in 2004 to a new class of “professional” investors that are predominately hedge funds.
Active trading strategies employed by hedge funds and active traders looking to capitalize on high levels of market volatility have transformed the currency market, Greenwich Associates found in its review of global FX trading trends and volumes.
“The changes that are occurring in the global FX have been so profound that the market has begun to evolve from its origin as a by-product of international trade and international capital markets transactions to an asset class in itself,” said Woody Canaday, a Greenwich consultant, in a statement.
The trend is evident in considering the number of electronic trading platforms that have sprung up in the past year, many gearing their services to the hedge fund community.
It’s estimated that daily FX volumes surpass $2.5 trillion.
Hedge funds, like other new FX traders, were attracted to last year’s U.S. dollar volatility and the price volatility in commodities that are priced in dollars. According to another Greenwich consultant, Frank Feenstra, such trends produced a “currency volatility bonanza for hedge funds.”
Europe still accounts for the majority of global currency trading volume. On a country-by-country basis, U.K. and U.S. traders are leaders in terms of volume, which makes sense given that the majority of hedge fund operations are in those nations.
With 60% of the FX volume originating in Europe, the United Kingdom leads the way in growth, with a 42% increase in its FX trading totaling US$55.4 billion annually. Trade volumes in the United States rose 39% to US$54.5 billion, according to Greenwich.
At the same time, market trends have dealt an uneven hand to interest-rate derivatives traders. Volume in this area dropped by more than 12% during 2004. Significant decreases in trading volume were reported in almost every major market worldwide. Asia saw the biggest fall, with year-to-year volume dipping by 29%.
Greenwich reports that the decline in volumes is due to the stability in global interest rates and the lack of hedging incentives. At the same time, the FX frenzy continues unabated. Not until volatility in FX trading subsides will the hedge funds appetite for currency plays diminish, officials concluded.
Contact Bob Keane with questions or comments at: email@example.com.