Sept. 28 (Bloomberg) -- Foreign-exchange trading surged to a record daily average of $1.9 trillion this year as hedge funds and other money managers increased bets on currencies, according to the Bank for International Settlements.

The value of transactions, which is about four times the average trading each day in U.S. Treasury securities, rose 36 percent from 2001, at constant exchange rates, the BIS said in its Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity.

Turnover tripled in the past 15 years and more than recovered from a drop in the three years to 2001, swelling revenue at banks including HSBC Holdings Plc, UBS AG and Citigroup Inc. Dealing between banks and other financial institutions rose to a third of the total as hedge funds bet on a slide in the dollar.

``Foreign exchange, particularly in 2003, was a terrific asset class to trade,'' Benjamin Welsh, head of foreign-exchange sales and trading in North America for HSBC in New York, said in an interview on Sept. 1. ``People made an awful lot of money; foreign exchange has been in vogue.''

The dollar, which the BIS said was on one side of 89 percent of all transactions, weakened 15 percent last year and fell 9.3 percent in 2002, according to a Federal Reserve index tracking the dollar against currencies of major U.S. trading partners.

Average daily currency trading rose 57 percent since 2001 in current exchange rates. The growth still hasn't kept pace with turnover in the U.S. Treasury market, which rose 65 percent from 2001 to $492 billion this year, according to statistics from the Federal Reserve's New York branch.

Betting on the Dollar

Daily average trading on the New York Stock Exchange is about 10 percent higher since 2001, at about $46 billion this year, NYSE data show. Nasdaq trading averaged $49.1 billion a day in April 2001, and fell to about $11 billion as of August 2004.

Wagers by speculators including hedge funds on a dollar decline against the euro reached a record in July this year, eclipsing the previous high in May 2002, according to the Commodity Futures Trading Commission in Washington.

``Foreign-exchange is being more actively traded than ever as an asset class,'' said Rashid Hoosenally, head of foreign- exchange client strategy at Deutsche Bank AG in London.

The dollar fell to a record $1.2930 per euro on Feb. 18. A day earlier, it tumbled to $1.9140 against the British pound, the lowest since September 1992. In March, the dollar slipped to 103.40 yen, the weakest since 2000. The dollar has since recovered to $1.2320 per euro at about 3:05 p.m. in New York and 111.42 yen.

`Asset Class'

``Investors' interest in foreign exchange as an asset class alternative to equity and fixed income, the more active role of asset managers, and the growing importance of hedge funds'' probably contributed to the increased trading, the BIS said.

In the third quarter of 2001, Barclay Trading Group Ltd., a Fairfield, Iowa, firm that tracks hedge funds and commodity trading advisers, tallied a total of 65 trading programs dedicated to currencies, controlling $4.4 billion in assets. In July those totals had risen to 87 programs with $12.6 billion.

Hedge funds have hired currency strategists away from some of the biggest currency-trading banks as the foreign-exchange business expanded.

In May, Soros Fund Management LLC hired Marcel Kasumovich from Merrill Lynch & Co. in New York, where he had worked as head of G-10 foreign-exchange strategy. Michael Rosenberg, who resigned as Deutsche Bank's head of currency research in New York in June, joined investment firm Harbert Management Corp. in July to work on the firm's global macro investment team.

`Boom'

The BIS also said over-the-counter derivatives trading more than doubled in the past three years, surging 112 percent to $1.2 trillion. The figures include derivatives such as cross-currency swaps and options and all interest-rate derivative contracts.

The past two years were ``a foreign-exchange boom,'' said Jeremy Fand, senior proprietary currency trader in New York at WestLB AG and former head of currency strategy at UBS. ``It will always remain an asset class now.''

The survey by the Basel, Switzerland-based BIS was conducted in April by central banks and monetary authorities in 52 nations. It covers trading in currency spot, forwards and swaps markets and will be updated in the first half of 2005.

Foreign-exchange turnover exceeds the International Monetary Fund's estimates for the gross domestic product of all but three of the world's economies: the U.S., Japan and Germany.

``The foreign-exchange market has been much better this year than the conditions described in the last survey in 2001,'' said Tetsuji Ogino, deputy general manager of the foreign-exchange and treasury division in Tokyo at Bank of Tokyo-Mitsubishi Ltd.

Banks' Revenue

Banking revenue from foreign-exchange trading also got a boost in the past three years amid the gain in transactions.

Citigroup's trading revenue related to foreign exchange jumped from $1.1 billion in 2000 to $1.5 billion in 2001, then to about $1.8 billion in each of the past two years, the company's annual reports show. Citigroup has a 9.4 percent share of the currency market, according to Euromoney magazine.

At HSBC, foreign-exchange dealing revenue rose to $1.24 billion last year, from $1.12 billion in 2001, the company's annual report shows. UBS, which Euromoney ranks as the biggest trader in the currency market with 12.4 percent, said in its 2003 report that it derived 1.5 billion Swiss francs ($1.2 billion) from foreign-exchange trading last year.

UBS, Deutsche Bank, Citigroup, JPMorgan Chase & Co. and HSBC -- the five largest currency traders -- have a combined 44.6 percent share of the market, Euromoney estimates.

Porsche's Hedging

Trading between banks and financial customers, such as hedge funds, rose to a third from 28 percent in 2001, the BIS said. Transactions between dealers accounted for 53 percent of the total, down from 59 percent. The remaining 14 percent was between dealers and non-financial customers.

The euro-U.S. dollar exchange rate accounted for the biggest share of daily trading, at 28 percent, down from 30 percent in 2001. Dollar-yen followed with 17 percent and then dollar-British pound at 14 percent.

The dollar's involvement in almost 90 percent of all trades was more than double the euro's 37 percent share, BIS said. Both were little changed since 2001. The yen factored into 20 percent of trades and the British pound 17 percent.

Trading in the Australian dollar more than doubled in the past three years to an average $104.5 billion a day, BIS said.

A falling dollar spurred companies such as carmaker Porsche AG to guard against currency fluctuations. Europe's most profitable carmaker is hedged against swings in the U.S. currency through 2008, Chief Financial Officer Holger Haerter said in an interview on Sept. 22. It was previously hedged through 2007.

London retained its spot as the currency market's capital, with 31 percent of total trading taking place there. The U.S. ranked second, with 19 percent, followed by Japan at 8 percent. Singapore and Germany were next with 5 percent of the total.

The BIS, formed in 1930, provides banking services for 120 financial institutions, including central banks.

To contact the reporter on this story: Mark Tannenbaum in New York at at mtannen@bloomberg.net.

Last Updated: September 28, 2004 15:14 EDT