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Foreign exchange market review: UK takes dominant role in global financial activities

Published on 27th June, Edition 26- 2016

 

The foreign exchange market is a place where foreign money bought and sold. The buyers and sellers have claim on foreign money and the intermediaries together constitute a foreign exchange market. It is a market for a national currency (foreign money) anywhere in the world, as the financial centers of the world are united in a single market. The foreign exchange market is a large trade center for currencies. It facilitates monetary transactions between countries through evaluating a currency’s stability. Through easing the conversion of a currency to another, a business relationship could be made between nations.

Foreign exchange dealers vs other dealers

There is a wide variety of dealers in the foreign exchange market. The most important among them are the banks. Banks dealing in foreign exchange have branches with substantial balances in different countries. Through their branches and correspondents, the services of such banks, usually called ‘Exchange Banks,’ are available all over the world.

These banks discount and sell foreign bills of exchange, issue bank drafts, effect telegraphic transfers and other credit instruments, and discount and collect amounts on the basis of such documents.

Other dealers in foreign exchange are bill brokers who help sellers and buyers in foreign bills to come together. They are intermediaries and unlike banks are not direct dealers.

Acceptance houses are another class of dealers in foreign exchange. They help effect foreign remittances by accepting bills on behalf of customers.

The central bank and treasury of a country are also dealers in foreign exchange. Both may intervene in the market occasionally.

London foreign exchange market

There are various trading centers in the world. The one in London is considered the major transaction center. Others are found in countries like US, Singapore, Hong Kong and Tokyo. The trading processes continuously happen every day except for weekends.

As soon as the Asian currency trade ends, European session starts, then the North American Session and back to the Asian session. This becomes a cycle.

Increases lead in global FX trading while global turnover falls. According to new figures released last week by TheCityUK, the UK increased its share of global foreign exchange (FX) trading in April 2015 to 43.1 percent – up 1.7 percent compared to six months ago, and just short of its record of 43.2 percent twelve months ago.

This growth was achieved against an 11 percent decline in global FX transactions, including spot transactions, outright forwards and FX swaps. These totaled $5.1 trillion in April 2015, down from a record $5.7 trillion turnover six months ago.

TheCityUK’s estimates, based on individual surveys of foreign exchange activity released this week by central banks in the UK, US, Japan, Australia, Canada and Singapore show that the UK’s share was well ahead of the next three largest trading centers – US (15 percent), Singapore (7 percent) and Japan (6 percent) – with London accounting for the bulk of the UK’s daily turnover, averaging $2,481 billion.

Gary Campkin, Director, International Strategy, TheCityUK, said, “The latest figures show that more than twice as many US dollars are traded on the UK’s foreign exchange market than in the US, and more than double the amount of euros are traded in the UK than in all the euro-area countries combined.

“The UK’s strong position stems from trading generated by prime brokerage, investment banking and hedge funds, three areas of activity that are important to its position as an international financial centre.

London’s dominance further demonstrates its importance as an international foreign exchange hub and its position as Europe’s financial centre.”

According to Mr Campkin, despite the fall over the past six months, the volume of foreign exchange trading is on a long-term upward trend, tripling over the last 15 years.

This trend can be attributed to the growing importance of foreign exchange as an asset class and an increase in global fund management assets.

In addition, the diverse selection of execution venues and development of electronic platforms is making it easier for retail traders to access this market.

For the UK to remain a leading international financial centre, it must remain an attractive place in which and from which to do business.

To ensure this, the government should continue to implement bold and ambitious policies that both support the financial and related professional services industry and sustain the UK’s competitiveness in the global market.

US foreign exchange market

The US foreign exchange market forms a substantial portion of the US economy. This market is one of the most important sources of revenue for the United States government.

The official currency of the United States is a dollar. According to the ISO 4217 code, the US dollar is represented or symbolized as USD. It is also symbolized as $ or US$. Currently, the United States dollar is the most accepted form of foreign exchange on the global foreign exchange market, and it ranks as one of the five principal currencies of the world.

Numerous countries utilize the US dollar as their functional currency, a process frequently called official dollarization.

The Federal Reserve Bank of the United States regulates the country’s foreign exchange market. It also holds the sole authority to issue the US dollar banknotes and coins.

The US dollar is considered to be the standard unit or medium of foreign exchange for the global foreign exchange sector because of its high volume of liquidity and global recognition.

At present, the United States dollar is facing stiff competition from the euro (European currency), and ranks second after the euro as the most important international reserve currency.

The functions of the US foreign exchange market are carried out by a number of institutions: Commercial banks, central banks, foreign exchange dealers, retail foreign exchange brokers, commercial institutions, investment management firms, hedge fund institutions, multinational corporations or MNCs and retail foreign exchange traders.

New York is an important foreign exchange trading center in the United States. The leading foreign exchange brokerage firms of the world have their headquarters located there.

The United States Commodity Futures Trading Commission is responsible for regulating different foreign exchange trading firms conducting businesses in the United States. The US foreign exchange market is also known as US forex market and is an over-the-counter (OTC) market because the transactions are carried out with the direct involvement of forex buyers and sellers.

The exchange rate of the US dollar with respect to other foreign currencies is determined by the Federal Reserve. Both the Federal Reserve and the United States Treasury Department play a significant role in the US foreign exchange market. The Federal Reserve Bank is primarily responsible for formulating the foreign exchange policies of the country.

 

Singapore foreign exchange market

The foreign exchange market in Singapore is a growing market. The Singapore foreign exchange market bears a significant amount of importance with regards to the national economy of Singapore. Singapore has a free market economy and foreign exchange trading contributes to a significant extent towards maintaining the market equilibrium. It follows a floating foreign exchange system.

The official currency of Singapore is the Singapore dollar (S$). According to the ISO 4217 Code, the Singapore dollar is symbolized as SGD. The Singapore foreign exchange market is growing simply due the reason that the Singapore dollar is gaining more and more recognition in the global forex market due to its increased level of liquidity.

The Monetary Authority of Singapore (MAS) is the principal financial institution of Singapore. It has the sole authority of issuing the Singapore dollar banknotes and coins in Singapore. It is also responsible for regulating the exchange rates of Singapore dollar.

The foreign exchange rates in Singapore vary according to the exchange rates of Singapore dollar with the other foreign exchanges of the world.

The Monetary Authority of Singapore supervises the activities of the foreign exchange trading agencies and commercial banks carrying out the forex trading services in Singapore. The principal objective of the authority is to stabilize the financial infrastructure of Singapore with the help of foreign exchange devices so that it brings growth in the economy of Singapore.

Singapore is well-placed to expand its role as a major global trading hub. The Republic is home to some of the world’s largest commodity trading companies. The extensive network of buyers and sellers here creates an effective market place for global traders to structure their deals.

Singapore is the third-largest foreign exchange market, with the best US dollar liquidity in Asia, and now, the largest offshore yuan hub. As commodity trading becomes increasingly Asia-centric, global traders will be able to tap the deep liquidity available in Singapore to finance their high trade volumes, at the best prices.

Apart from Singapore’s sound physical infrastructure and logistical capabilities, Singapore’s political and economic stability gives traders the confidence to invest in key infrastructure and capabilities.

International Trading Program: Singapore, with its qualified workforce, openness to top global executives, and cultural and linguistic connections across Asia, is well positioned to further develop Asia-centric talent. As part of talent development efforts, IE Singapore, Nanyang Technological University (NTU) and five industry partners signed a memorandum of agreement recently to launch the International Trading Program

The program is expected to admit about 100 students a year, including those from fields such as engineering, business and maritime studies, to be trained in trade-related courses.

Graduates will develop an understanding of the commodity value chain, especially in the context of key Asian producers and markets.

This partnership will further enhance Singapore’s status as a leading global trading hub by grooming a steady stream of industry-ready NTU graduates, who will be able to contribute to the continued development of this exciting sector.

Important function, instrument

Today, however, these authorities manage exchange rates and implement exchange controls in various ways. In India, however, where there is a strict exchange control system, there is no foreign exchange market as such.

The important functions of a foreign exchange market are to transfer finance, purchasing power from one nation to another. Such transfer is affected through foreign bills or remittances made through telegraphic transfer.

Another function is provide credit for international trade and to make provision for hedging facilities, i.e. to facilitate buying and selling spot or forward foreign exchange.

The basic function of the foreign exchange market is to facilitate the conversion of one currency into another, i.e., to accomplish transfers of purchasing power between two countries.

In performing the transfer function, the foreign exchange market carries out payments internationally by clearing debts in both directions simultaneously, analogous to domestic clearings.

The other function of the foreign exchange market is to provide credit, both national and international, to promote foreign trade.

Another function of the foreign exchange market is to hedge foreign exchange risks. Hedging means the avoidance of a foreign exchange risk.

In a free exchange market when exchange rate, i.e., the price of one currency in terms of another currency, change, there may be a gain or loss to the party concerned.

Under this condition, a person or a firm undertakes a great exchange risk if there are huge amounts of net claims or net liabilities which are to be met in foreign money.

Exchange risk as such should be avoided or reduced. For this the exchange market provides facilities for hedging anticipated or actual claims or liabilities through forward contracts in exchange.

Foreign bills of exchange, telegraphic transfer, bank draft, letter of credit, etc., are the important foreign exchange instruments used in the foreign exchange market to carry out its functions.

The national bank of each country is allowed to fix their daily exchange rate decided upon by its government. This helps the market determine the stability of a currency known as the equilibrium. Various factors affect the stability of a currency such as the political and economic status of a nation.

Furthermore, the gross domestic product affects the flow of money to the market that determines fluctuations in the currency rates. Also, inflation, rates of interest, surpluses and other economic circumstances. The foreign exchange market discloses information about currency trade and currency values.

It has a high liquidity due to the large trading process (it involves large banks and financial institutions such as governments and central banks). Its networks or centers are found worldwide allowing trading processes all over the world that happens in a cycle.

The different factors that influence exchange rates make it unique. It has a low relative profit margin compared to other existing markets. Moreover, this type of market is over-the-counter, which means dealers negotiate among themselves rather than having a central trade.

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