Where Do We Go from Here?
In the last Triennial Survey of Foreign Exchange, the BIS noted that average daily turnover in FX between 2001 and 2004 rose by 57% at current exchange rates. Moreover, average daily turnover in the FX derivatives market and the OTC derivatives market generally were both up around 110% over the same time span. The factors contributing to that impressive surge in traded volume include “the growing importance of hedge funds,” “investors’ interest in foreign exchange as an asset class alternative to equity and fixed income,” “the more active role of asset managers,” “clear trends” leading to “momentum trading,” “higher volatility,” which “induced an increase in hedging activity,” and “interest rate differentials,” which drove “carry” trades. Other factors are also identified as significant; these involve a trend for global institutional (or “real”) money (as opposed to hedge fund or leveraged capital) to seek offshore opportunities, the relaxation of restrictions on foreign exchange exposures for pension funds, and the increase in trading activities by commodity trading advisors (CTAs). Overall, this explosion in volume can be attributed to an expansion in FX transactions across the range of foreign exchange markets participants.
Although market conditions will continue to change, and international trade and capital flows will, as always, have direct and significant repercussions on the FX markets, there is no reason to believe that the realm ...

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