Global Finance Grows More Dependent on Currency Trading

LONDON, U.K. – As US Dollar decline, global finance is starting to become increasingly reliant on the opaque currency trading for continuous cash flow.

Both the short-term borrowers of dollars as well as banks are becoming more dependent on the foreign exchange market, valuing about $3.2 trillion each day, based on data reports. This move leaves such entities harmfully exposed in any case that lenders in the US stop providing cash in the system, even if they choose to do so only temporarily.

Back in September, they even had a scare when the Federal Reserve in the US has to draw cash to the market when there was a spike in the $2.2 trillion rates in the US repo market. The cash was liquidated into the FX swap markets.

Commenting on the issues, a forex trader at Canadian bank BMO, James Topham, said that it had affected a lot of traders in the FX swaps market greatly. According to him, it has caused a lot of panic in the entire market, increasing its volatility. He also added that the unusually persistent and large borrowing of dollars was apparent from clients on September 16.

The fear for many traders at the moment is that swaps could be the cause that the major passage for dollars, the US banks, will cut back the lending market to meet the rules on cash reserves.

Topham said that the regular supply dynamics by the end of the year would be thrown out.

Based on the figures from the BIS (Bank of International Settlements) from August, the FX swap volumes, reflected on its growing reliance on the currency markets, have already accumulated about 49% of the entire currency trading. Back in 2013, it has only represented about 42%.

Because of this, the BIS, along with the IMF (International Monetary Fund), the European Central Bank together with other monetary policymakers have started to be cautious amid the increasing value of borrowing dollars, which causes more costly fund investments for companies and global banks.

According to a lot of central bankers, one of the factors that lead to the growth in FX swaps is bank funding and borrowing through swaps, which is usually utilized for day-to-day liquidity management, and hedging among others.

Authorities are particularly keeping an eye on this issue at the end-period of 2019 as they are equally concerned about the ability of the borrowers to refinance, a central bank official commented.