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Global Currency Trading Will Grow to $10 Trillion a Day by 2020, UBS Says

By Anchalee Worrachate - 2010-10-27T00:00:01Z

Foreign-exchange trading will more than double to $10 trillion a day on average a decade from now, driven by portfolio diversification from central banks, pension funds, hedge funds and insurance companies, according to UBS AG.

Central banks will have a harder time influencing exchange rates because of the market’s size, wrote Mansoor Mohi-uddin, global head of currency strategy at UBS in Singapore. The Bank for International Settlements said in September that currency market volume rose to $4 trillion a day.

“The immense growth of currency markets is likely to draw in investors seeking liquidity to manage large-scale portfolios,” wrote Mohi-uddin in a research report today. “It also means central banks wishing to influence exchange rate levels through intervention will need to act more forcefully to have any sustained impact.”

UBS estimated that the daily turnover in currency markets related to hedge funds, pension funds, mutual funds, insurance companies and central banks rose 42 percent to $1.9 trillion in 2010 from $1.3 trillion in 2007.

The bank said these investors are likely over the next 10 years to be “more active in managing their portfolios of domestic and foreign assets as currency markets are likely to be super-volatile.”

Currency Market Growth

Neither financial market shocks nor disruption to international trade is likely to stop the expansion of the currency market, the bank said.

International trade accounts for “a small fraction” of total currency trading, the report said. UBS estimated that daily trading turnover associated with goods and services transactions was about $50 billion a day last year.

“While investors and policy makers worry about trade wars, the direct risks to global currency market turnover from a sharp drop in international trade flows seems limited,” wrote Mohi- uddin. “The experience of 2007-2010 shows the growth of foreign-exchange activity is resilient to shocks.”

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

To contact the editors responsible for this story: Daniel Tilles at dtilles@bloomberg.net; Rocky Swift at rswift5@bloomberg.net