WORLD FOREX:

TORONTO (Dow Jones)--The dollar posted relatively large gains versus the euro and most other major currencies Thursday, after a weak U.S. June nonfarm payrolls report encouraged currency players to shy away from risk ahead of Friday's U.S. Independence Day holiday.
Against expectations of a further 350,000 decline in U.S. employment rolls, June nonfarm payrolls instead fell by 467,000 and the U.S. unemployment rate rose to a 26-year high at 9.5%, demonstrating the continuing frailty of the labor market and the economy as a whole.
From a broad financial-market perspective, the report "prompted a sizable shift in risk appetite," said Michael Woolfolk, senior currency strategist at the Bank of New York Mellon, as riskier assets such as equities and commodities were sold heavily Thursday.
As such, said Woolfolk, the dollar's rally was largely a market-positioning move and "more indicative of players taking risk off the table ahead of the long holiday weekend, than any true recovery in the greenback itself."
The exception to Thursday's strong-dollar trend was the yen, which also rallied sharply. The yen benefitted more than the dollar on the move out of risk because it is more sensitive than the dollar to equities and long-end Treasury yields, both of which came down Thursday, said Tom Fitzpatrick, a currency strategist at Citigroup in New York.
Still, Thursday's big gains by the dollar and yen did nothing to break the recent pattern of mostly sideways trading in major currency pairs, as markets continue to suffer from a lack of overall direction and increasing occasional pockets of summertime illiquidity.
"Clearly, uncertainty has been the major theme over the past couple of weeks, which has served to stop the slide in the dollar," said senior foreign-exchange trader Brendan McGrath of currency services firm Custom House in Victoria, British Columbia.
That could change on more convincing evidence of economic recovery, McGrath suggested, although the dollar can still be expected to continue finding support from bad economic news, "as investors still remain content to park their money in U.S. Treasury bonds any time there is uncertainty in the market."
Midafternoon Thursday, the euro was at $1.4025 from $1.4147 late Wednesday. The dollar was at Y95.85 from Y96.67, according to EBS. The euro was at Y134.45 from Y136.76. The U.K. pound was at $1.6402 from $1.6475, and the U.S. dollar was at CHF1.0822 from CHF1.0748.
Overnight, China's dismissal of a report that it was seeking to debate a new international reserve currency at next week's Group of Eight meeting also lent some support to the dollar. China's vice foreign minister, He Yafei, said he hadn't heard of any such request. He said he hoped the dollar will be stable because of its role as the main reserve currency.
The euro also strengthened against the Swiss franc after Swiss National Bank directorate member Thomas Jordan said the central bank was ready to intervene in currency markets.
Jordan didn't indicate what exchange rate level would trigger intervention, nor did he give details regarding the amount of money that would be involved. However, its unconfirmed currency interventions over the past few months have occurred between CHF1.50 and CHF1.52 against the euro.
Last week, the SNB bought around EUR3 billion of foreign currencies, according to traders, to curb the Swiss franc's rise.
Elsewhere, the European Central Bank as expected left its key interest rate unchanged at 1.00% and offered only scant revisions to its outlook for inflation and eurozone economic prospects.
Sweden's central bank, however, surprised markets Thursday by halving its key interest rate for the third consecutive time to a new record low of 0.25% due to the continued frailty of the Swedish economy. a

Forex Training

Don’t leave your trading results to luck. We have a trading methodology that can help you get better results. It is a simple and objective way to trade the Forex market, based on price action: we let the market tell us which way it's heading. We then follow a rigid position and risk management technique. Following this forex strategy with discipline helps us get consistent results.

FOREX-US dollar drops to 2009 low on ratings worries

* Dollar under pressure on ratings concerns, risk-taking

* Dollar index drops to 2009 low, euro breaks $1.40

* Focus on U.S. Treasury auctions next week

(Adds details, updates prices)

By Wanfeng Zhou and Vivianne Rodrigues

The U.S. dollar dropped to its lowest level this year on Friday, and was on track for its biggest weekly fall in two months, on growing concerns about the AAA-rating status of the United States.

Investors worried about the U.S. sovereign credit rating after Standard & Poor's said it might cut Britain's AAA rating on Thursday, triggering heavy selling of in U.S. Treasury bonds and the dollar, although U.S. stocks edged up on Friday.

The ratings outlook downgrade of Britain focused attention on soaring fiscal deficits and debt in the United States fueled in part by the unprecedented efforts by the U.S. Treasury and the Federal Reserve to bolster the financial system.

"The fact that the market has seized on these concerns suggests that the impact of the recent monetary and fiscal easing is starting to grow, and certainly that points to a lower dollar moving forward," said Todd Elmer, currency strategist at Citigroup in New York.

A rise in U.S. stocks and more upbeat views of the recession-hit global economy also encouraged risk-taking by investors, helping the euro break above $1.40, while sterling hit a 6 1/2-month peak versus the dollar.

The dollar has come under heavy pressure in recent weeks as growing optimism that the worst of the global economic slump may be past dented safe-haven flows into dollar-denominated assets.

"So far, the market (has been) very much focused on the global recession and ... how quick and strong will the recovery be," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto.

The S&P news "has opened for the dollar a very worrying Pandora's box," he said.

The dollar index .DXY was on track for a 3.6 percent drop this week, the worst week since March. The index has lost more than 5.0 percent so far in May, one of its steepest monthly declines over the last 25 years.

In afternoon trading in New York, the ICE Futures U.S. dollar index .DXY, a gauge of its value against six major currencies, was down 0.6 percent on the day after hitting 79.805, a fresh 2009 low.

The euro was up 0.8 percent at $1.4009 , after hitting a session peak of $1.4050, according to Reuters data, the highest since early January.

The foreign exchange market (currency, forex, or FX) is where currency trading takes place. It is where banks and other official institutions facilitate the buying and selling of foreign currencies. ^[1]FX transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. The foreign exchange market that we see today started evolving during the 1970s when worldover countries gradually switched to floating exchange rate from their erstwhile exchange rate regime, which remained fixed as per the Bretton Woods system till 1971.

Presently, the FX market is one of the largest and most liquid financial markets in the world, and includes trading between large banks, central banks, currency speculators, corporations, governments, and other institutions. The average daily volume in the global foreign exchange and related markets is continuously growing. Traditional daily turnover was reported to be over US$3.2 trillion in April 2007 by the Bank for International Settlements.^[2] Since then, the market has continued to grow. According to Euromoney's annual FX Poll, volumes grew a further 41% between 2007 and 2008.^[3]

The purpose of FX market is to facilitate trade and investment. The need for a foreign exchange market arises because of the presence of multifarious international currencies such as US Dollar, Pound Sterling, etc., and the need for trading in such currencies.

Market size and liquidity

The foreign exchange market is unique because of

• its trading volumes,
• the extreme liquidity of the market,
• its geographical dispersion,
• its long trading hours: 24 hours a day except on weekends (from 22:00 UTC on Sunday until 22:00 UTC Friday),
• the variety of factors that affect exchange rates.
• the low margins of profit compared with other markets of fixed income (but profits can be high due to very large trading volumes)
• the use of leverage

Main foreign exchange market turnover, 1988 - 2007, measured in billions of USD.

As such, it has been referred to as the market closest to the ideal perfect competition, notwithstanding market manipulation by central banks. According to the Bank for International Settlements,^[2] average daily turnover in global foreign exchange markets is estimated at $3.98 trillion. Trading in the world's main financial markets accounted for $3.21 trillion of this. This approximately $3.21 trillion in main foreign exchange market turnover was broken down as follows:

• $1.005 trillion in spot transactions
• $362 billion in outright forwards
• $1.714 trillion in foreign exchange swaps
• $129 billion estimated gaps in reporting

Of the $3.98 trillion daily global turnover, trading in London accounted for around $1.36 trillion, or 34.1% of the total, making London by far the global center for foreign exchange. In second and third places respectively, trading in New York accounted for 16.6%, and Tokyo accounted for 6.0%.^[4] In addition to "traditional" turnover, $2.1 trillion was traded in derivatives.

Exchange-traded FX futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts.

Several other developed countries also permit the trading of FX derivative products (like currency futures and options on currency futures) on their exchanges. All these developed countries already have fully convertible capital accounts. Most emerging countries do not permit FX derivative products on their exchanges in view of prevalent controls on the capital accounts. However, a few select emerging countries (e.g., Korea, South Africa, India—[1]; [2]) have already successfully experimented with the currency futures exchanges, despite having some controls on the capital account.

FX futures volume has grown rapidly in recent years, and accounts for about 7% of the total foreign exchange market volume, according to The Wall Street Journal Europe (5/5/06, p. 20).

Top 10 currency traders ^[5]
% of overall volume, May 2008

Rank	Name	Volume
1	Deutsche Bank	21.70%
2	UBS AG	15.80%
3	Barclays Capital	9.12%
4	Citi	7.49%
5	Royal Bank of Scotland	7.30%
6	JPMorgan	4.19%
7	HSBC	4.10%
8	Lehman Brothers	3.58%
9	Goldman Sachs	3.47%
10	Morgan Stanley	2.86%

Foreign exchange trading increased by 38% between April 2005 and April 2006 and has more than doubled since 2001. This is largely due to the growing importance of foreign exchange as an asset class and an increase in fund management assets, particularly of hedge funds and pension funds. The diverse selection of execution venues have made it easier for retail traders to trade in the foreign exchange market. In 2006, retail traders constituted over 2% of the whole FX market volumes with an average daily trade volume of over US$50-60 billion (see retail trading platforms).^[6] Because foreign exchange is an OTC market where brokers/dealers negotiate directly with one another, there is no central exchange or clearing house. The biggest geographic trading centre is the UK, primarily London, which according to IFSL estimates has increased its share of global turnover in traditional transactions from 31.3% in April 2004 to 34.1% in April 2007. The ten most active traders account for almost 80% of trading volume, according to the 2008 Euromoney FX survey.^[3] These large international banks continually provide the market with both bid (buy) and ask (sell) prices. The bid/ask spread is the difference between the price at which a bank or market maker will sell ("ask", or "offer") and the price at which a market-maker will buy ("bid") from a wholesale customer. This spread is minimal for actively traded pairs of currencies, usually 0–3 pips. For example, the bid/ask quote of EUR/USD might be 1.2200/1.2203 on a retail broker. Minimum trading size for most deals is usually 100,000 units of base currency, which is a standard "lot".

These spreads might not apply to retail customers at banks, which will routinely mark up the difference to say 1.2100/1.2300 for transfers, or say 1.2000/1.2400 for banknotes or travelers' checks. Spot prices at market makers vary, but on EUR/USD are usually no more than 3 pips wide (i.e., 0.0003). Competition is greatly increased with larger transactions, and pip spreads shrink on the major pairs to as little as 1 to 2 pips.

Market participants

Financial markets

Bond market Fixed income Corporate bond Government bond Municipal bond Bond valuation High-yield debt

Stock market Stock Preferred stock Common stock Registered share Voting share Stock exchange

Foreign exchange market

Derivatives market Credit derivative Hybrid security Options Futures Forwards Swaps

Other Markets Commodity market Money market OTC market Real estate market Spot market

Finance series Financial market Financial market participants Corporate finance Personal finance Public finance Banks and Banking Financial regulation

v • d • e

Unlike a stock market, where all participants have access to the same prices, the foreign exchange market is divided into levels of access. At the top is the inter-bank market, which is made up of the largest investment banking firms. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and usually unavailable, and not known to players outside the inner circle. The difference between the bid and ask prices widens (from 0-1 pip to 1-2 pips for some currencies such as the EUR). This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the foreign exchange market are determined by the size of the “line” (the amount of money with which they are trading). The top-tier inter-bank market accounts for 53% of all transactions. After that there are usually smaller investment banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail FX-metal market makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s.” (2004) In addition, he notes, “Hedge funds have grown markedly over the 2001–2004 period in terms of both number and overall size” Central banks also participate in the foreign exchange market to align currencies to their economic needs.

Banks

The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's own account.

Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees. Today, however, much of this business has moved on to more efficient electronic systems. The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.

Commercial companies

An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.

Central banks

National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high—that is, to trade for a profit based on their more precise information. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.

The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives. The combined resources of the market can easily overwhelm any central bank.^[7] Several scenarios of this nature were seen in the 1992–93 ERM collapse, and in more recent times in Southeast Asia.

Hedge funds as speculators

About 70% to 90% of the foreign exchange transactions are speculative. In other words, the person or institution that bought or sold the currency has no plan to actually take delivery of the currency in the end; rather, they were solely speculating on the movement of that particular currency. Hedge funds have gained a reputation for aggressive currency speculation since 1996. They control billions of dollars of equity and may borrow billions more, and thus may overwhelm intervention by central banks to support almost any currency, if the economic fundamentals are in the hedge funds' favor.

Investment management firms

Investment management firms (who typically manage large accounts on behalf of customers such as pension funds and endowments) use the foreign exchange market to facilitate transactions in foreign securities. For example, an investment manager bearing an international equity portfolio needs to purchase and sell several pairs of foreign currencies to pay for foreign securities purchases.

Some investment management firms also have more speculative specialist currency overlay operations, which manage clients' currency exposures with the aim of generating profits as well as limiting risk. Whilst the number of this type of specialist firms is quite small, many have a large value of assets under management (AUM), and hence can generate large trades.