Foreign exchange trading volumes in London have surged by 39 per cent in the past year, with turnover in New York up by 31.5 per cent in the same period, figures released on Monday showed.
The surge in volumes has been attributed to the continuing emergence of foreign exchange as an asset class in its own right, the onward march of the hedge fund, higher volatility across all asset classes, rising global imbalances and the expansion of electronic trading platforms.
London, which has retained its pre-eminence in foreign exchange trading, boasting average daily volumes of $1,029bn in April, compared to $577bn in New York, is believed to have benefited from a rising tide of petrodollars being chanelled through the city, which has strong banking links with the Middle East and Russia.
“Oil prices have continued to surge this year, bolstering petrodollar profits, which are traditionally routed through the London financial centre,” said Michael Woolfolk, senior currency strategist at Bank of New York.
Data from the UK, US, Canada and Singapore showed overall currency trading volumes in those four centres rose by 19 per cent to $1,860bn a day in the six months to April. Comparable data are due from Tokyo on Tuesday.
The most staggering growth has come in forward transactions, with the New York-based Foreign Exchange Committee reporting a rise of 66 per cent in such transactions in the six months to April, and the Foreign Exchange Joint Standing Committee seeing growth of 45 per cent in London.
Mr Woolfolk attributed this to rising market volatility, particularly in commodity prices, which is likely to have led to a rise in the desire to hedge positions.
“The use of forwards rises in periods of high risk. If there is more erratic movement in prices that leads to more turnover,” he said.
FXAll, an electronic trading platform, said it had seen a 60 per cent increase in trading by hedge funds in the year to the second quarter of 2006, and a 70 per cent rise in activity by long-only asset managers. It attributed the rises to higher market volatility.
The London data showed a rise in the proportion of trades involving the euro, from 44 to 46 per cent, largely at the expense of sterling. However the Canadian data suggested that both the euro and Swiss franc are losing market share at the expense of the high-yielding Australian dollar, a favoured currency of carry trade investors.
