Once every three years, the Bank of International Settlements publishes the results of a survey about the size of foreign exchange markets. The most recent \”Triennial Central Bank Survey,\” subtitled \”Foreign exchange
turnover in April 2013: preliminary global results,\” has some familiar news.
Foreign exchange markets are extraordinarily large. \”Trading in foreign exchange markets averaged $5.3 trillion per day in April 2013. This is up from $4.0 trillion in April 2010 and $3.3 trillion in April 2007.\” The growth rate of the foreign exchange market in recent years has been about 35% annually.
What accounts for this very large total? In round numbers, world GDP is about $70 trillion, and world exports are about 30% of that amount–call it $21 trillion per year. Clearly, foreign exchange markets are not mainly driven by the direct needs of exchanging currency for exports and imports. Flows of foreign direct investment around the world were about $1.3 trillion in 2012. Total global holdings of portfolio investment were about $39 trillion in 2011. Thus, it doesn\’t seem that the need to exchange currency for either foreign direct investment or for portfolio investment can explain what\’s happening in foreign exchange markets, either. The remaining possible explanation is that the enormous size of exchange rate market arises primarily out of short-term decisions about hedging risk and seeking return in a global economy, where many financial and nonfinancial firms are continually adjusting their exposure to the possibilities of future movements in exchange rates.
Another main message of the BIS report concerns the role of the U.S. dollar in foreign exchange markets. It continues to be true, as it has been for decades, that many foreign exchange trades between currencies A and B involve first turning a currency into U.S. dollars, and then switching to the other currency. \”The US dollar remained the dominant vehicle currency; it was on one side of 87% of all trades in April 2013. The euro was the second most traded currency, but its share fell to 33% in April 2013 from 39% in April 2010. The turnover of the Japanese yen increased significantly between the 2010 and 2013 surveys. So too did that of several emerging market currencies, and the Mexican peso and Chinese renminbi entered the list of the top 10 most traded currencies.\”
I\’ll attach a list of currencies, in the order they are traded in foreign exchange markets. Of course, the report has more details about changes since the first survey in 1998, as well as the specific financial instruments used.