Article provided by The Federal Reserve Bank of New York

In 1998, the Federal Reserve’s most recently published survey of reporting dealers in the United States estimated that foreign exchange turnover in the U.S. market was $351 billion a day, after adjustments for double counting. That total is an increase of 43% above the estimated turnover in 1995 and more than 60 times the turnover in 1977, the first year for which roughly comparable survey data are available.

In some ways, this estimate understates the growth and the present size of the U.S. foreign exchange market. The $351 billion estimated daily turnover covered only the three traditional instruments in the “over-the-counter” (OTC) market—spot, outright forwards, and foreign exchange (FX) swaps; it did not include over-thecounter currency options and currency swaps traded in the OTC market, which totaled about $32 billion a day in notional value (or face value) in 1998. Nor did it include the two products traded, not “over-the-counter,” but in organized exchanges— currency futures and exchange-traded currency options, for which the notional value of the turnover was perhaps $10 billion per day.

The global foreign exchange market also has shown phenomenal growth. In 1998, in a survey under the auspices of the Bank for International Settlements (BIS), global turnover of reporting dealers was estimated at about $1.49 trillion per day for the traditional products, plus an additional $97 billion for over-the-counter currency options and currency swaps, and a further $12 billion for currency instruments traded on the organized exchanges. In the traditional products, global foreign exchange turnover, measured in current exchange rates, increased by more than 80 percent between 1992 and 1998.

The expansion in foreign exchange turnover, in the United States and globally, reflects the continuing growth of international trade and the prodigious expansion in global finance and investment during recent years. With respect to trade, the dollar value of United States international transactions in goods and services—the sum of exports and imports—tripled between 1980 and 1995 to around 15 times its 1970 level. International trade in the global economy also has expanded at a rapid pace.World merchandise trade is now more than 2½ times its 1980 level.

But international trade cannot account for the huge increase in the U.S. foreign exchange turnover over the past twenty-five years. The enormous expansion of international capital transactions, both here and abroad, has been a dominant force. U.S. international capital inflows,including sales of U.S. bonds and equities to foreigners, acquisition of U.S. factories by foreigners, and bank deposit inflows, have averaged more than $180 billion per year since themid-80s.

Large and persistent external trade and payments deficits in the United States and corresponding surpluses abroad have contributed to the growth in financing. Through much of the period since 1983, the United States has recorded trade deficits in the range of $100-$200 billion per year, while Japan and, to a lesser extent, Germany have registered substantial trade surpluses. In contrast, all three countries experienced only modest trade deficits or surpluses through the 1960s and early 1970s.

The internationalization of financial activity has increased rapidly.Cross-border bank claims are now nearly five times the level of 15 years ago; as a percentage of the combined GDP of the OECD countries, these claims have risen from about 25 percent in 1980 to about 42 percent in 1995.During that same period, crossborder securities transactions in the three largest economies—United States, Japan, and Germany—expanded from less than 10 percent of GDP to around 70 percent of GDP in Japan and to well above 100 percent of GDP in Germany and the United States. Annual issuance of international bonds has more than quadrupled during the past ten years. Between 1988 and 1993, securities settlements through Euroclear and Cedel—the two main Euro market clearing houses— increased six-fold.

All of this provided fertile ground for growth in foreign exchange trading.

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