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Chart Of The Week: The Cause Of FX

By Craig Hoyda, Senior Quantitative Analyst, Multi-Asset Investing

Source: BIS, Aberdeen Standard Investments (as of April 2019)

The Bank for International Settlements (BIS) released its latest triennial report on foreign exchange market activity. Total turnover reached $6.6 trillion (tn) per day, $1.4tn higher than that seen in the 2016 survey. The US dollar consolidated its status as the world’s most traded currency, being on one side of 88% of global currency trades.

China’s efforts to internationalise the renminbi (RMB) have been slow to materialise even though the IMF added the currency to its special drawing rights basket of reserve currency in September 2016. The Chinese have also launched renminbi-denominated commodity futures contracts and have extended lines of FX swaps to various countries’ central banks. Indeed, recent actions to relax quotas on foreign ownership of the domestic bond market are a continuation of their efforts. Despite all this, the RMB is only the eighth most traded currency in the survey, increasing $82bn from the 2016 level and representing just 4.3% of global transactions.

Although market commentators often note grand plans for a system of regional reserve currencies, the US dollar remains the dominant currency within global FX transactions. While the dollar remains king of the currencies, London remains the centre of the trading universe. In fact, despite Brexit, the London share of FX dealing rose by six percentage points to 43% in 2019. Nevertheless, conditions can change over the long term. A century ago, the pound had a similarly dominant status in currency transactions as the dollar has now.

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