U.S. currency market grows 50% in 3 years Daily trading up to $192 billion

September 25, 1992|By Ian Johnson | Ian Johnson,New York Bureau

NEW YORK -- The U.S. foreign exchange market grew by 50 percent over the past three years, to $192 billion a day, an astronomical sum that demonstrates why governments are having trouble controlling the fate of their currencies.

The figures came from a report released yesterday by the Federal Reserve Bank of New York, which compiles the statistics every three years as part of an international program to study the foreign exchange markets.

Others countries' reports showed that London remained the largest foreign exchange market in the world, with $303 billion traded each day. Tokyo has not yet released its figures but is expected to be in third place with about $150 billion in trades a day.

In all, the global foreign exchange markets probably trade $900 billion daily, nearly double the 1989 figure. By comparison, total U.S. imports and exports add up to about $2.6 billion a day.

The report came in the midst of Europe's worst financial crisis in 20 years, during which finance ministers claimed that currency traders have undermined their plans for closer economic cooperation among the European Community.

Further, the figures showed why central banks have been

unsuccessful in stabilizing currency exchange rates by spending billions to prop up their currencies, said Neil Soss, chief economist with First Boston Corp.

Three European countries had to pull their currencies temporarily out of the European Monetary System earlier this month when currency traders sold them en masse in favor of other currencies. The countries' central banks tried to intervene -- traders said that at least $25 billion was spent -- but to no avail.

Faced with capital flows of nearly $1 trillion a day, buying a few billion dollars or German marks would do little, said Paul Boltz, financial economist for T. Rowe Price & Associates in Baltimore.

"The proof is in the pudding," Mr. Boltz said. "The banks really wanted to hold things together last week but they couldn't. They are still the biggest single players in the market, but the market has so many players that they can't dominate anymore."

Although the most-recent report showed that the size of the U.S. currency market surpassed that of government securities, which about $140 billion a day, the currency market's rate of growth has tapered off. The Federal Reserve Bank's last report, which looked at the period between 1986 and 1989, showed a 121 percent increase in daily currency turnover compared with the 49 percent increase over the past three years.

"On the whole, foreign exchange markets are a lot more stable than they were before. There's much less volatility, despite what we've seen over the past month," Mr. Soss said.

Volatility still exists, however, because the foreign exchange market remains in a long-term transition from being regulated through currency controls to an open trading system. Even if the market didn't grow as fast between 1989 and 1992 as during the preceding three-year period, the rate of growth still dwarfs the expansion of other markets, Mr. Boltz said.

Other findings of the study, which was conducted in April, show that:

* The share of trading in U.S. dollars dropped to 89 percent from 96 percent. German marks accounted for 10 percent and other currencies for 1 percent.

* The average size of a deal rose to $6 billion from $5 billion for financial institutions and to $7 billion from $6 billion for brokers.

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