Pension funds partly responsible for latest dollar downwave 

By Neil Behrmann

London, May 06: Traditional institutions such as pension funds are playing a much bigger role in foreign exchange trading and are thus partly responsible for latest dollar down wave.

The activity of institutions caused global foreign exchange trading volume to rise by almost 14 per cent to around US2.2 trillion in 2005, estimates Greenwich.

Pension fund foreign exchange trading grew at a faster pace than that of hedge funds in 2005, according to Greenwich. Pension fund foreign exchange trading was the result of hedging foreign exchange exposure on their international equity and bond investments. Growing numbers of pension funds are also using so called “currency overlay” strategies which also speculate in the foreign exchange markets to boost overall returns.

Across Europe, the US, Asian Pacific and other regions, financial institutions were behind volume growth in the foreign exchange markets. Their dealings were well in excess of companies that need to hedge in foreign exchange markets to ensure steady prices and volumes of exports and reduce costs of imports. Within the financial category, however, the primary sources of trading volume were shifting, accordinbg to Greenwich. In 2004, hedge funds were the primary drivers of new foreign exchange trading growth. But in 2005, activity shifted to pension funds and other financial institutions. Average foreign exchange trading volumes among pension funds and traditional fund managers increased by almost 48 per cent from 2004 to 2005. As a result of this growth, the portion of their total global trading volume rose from 15 per cent in 2004 to almost 20 per cent in 2005.

Also on the rise as a source of global foreign exchange trading volume were financial institutions that capture and aggregate the growing flow of retail foreign exchange business. The portion of total foreign exchange trading volume attributable to these institutions increased from 8 per cent in 2004 to 10 per cent in 2005. Based on 2005 trading volumes, this segment of the market generates as much as the annual foreign exchange volume dealings of hedge funds, says Greenwich Associates consultant Tim Sangston.

Foreign exchange trading volume increased some 40 per cent in the UK from 2004 to 2005 and rose by 20 per cent in the US. Meanwhile, volume increased only 7 per cent in Continental Europe because the euro replaced several currencies. Volume was roughly flat in Japan and declined by more than 10 per cent in the rest of Asia, estimates Greenwich. But Asian currency trading is predicted to improve as analysts forecast a revival in the yen which at 114 to the dollar is the highest in six months. in that period the Koream won has risen by 11 per cent and is back to levels seen prior to the 1997 Asian currency crisis.

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