Foreign Exchange Trading: 2019 Edition

Every so often, new data provide us a glimpse of parts of the world that few people ever see. Last week, the BIS’s Triennial Central Bank Survey of Foreign Exchange and Over-the-counter (OTC) Derivatives Markets in 2019 provided just such a view. The headline is that average daily foreign exchange (FX) turnover, adjusted for double counting, is $6.6 trillion per day. That is, nearly 8% of global GDP changes hands in FX markets every day! (For a summary, you can listen here.)

Numbers of this magnitude raise a host of questions. In this post, we explore three: first, who is shifting such large volumes of currency around, and what motivates them? Second, history teaches us that disruptions in FX markets can destabilize the broader financial system: are there signs of emerging risks? Finally, what do we learn about the relative position of the U.S. dollar?

To anticipate our conclusions, the fraction of trading involving nonfinancial entities is relatively small, so the bulk of these transactions (like those in most financial markets) are between intermediaries. In addition, there are hints of growing systemic risk in the FX settlement system, so we need to remain attentive. Finally, no other currency is threatening the dominance of the U.S. dollar—at least, not yet….

Just say no to exchange rate intervention

Whenever possible, policymakers should explore a broad set of options before responding to challenges they face. However, when the President and his advisers recently discussed foreign currency intervention, we hope everyone quickly concluded that it would be a profoundly bad idea.

Before we get started, it is important to explain what foreign currency intervention is and how it is done….

Fire, fury and the national debt limit

During the 2016 campaign, then-candidate Donald Trump discussed his broad experience with debt. He would bring the skills and sensibilities of a real estate mogul to government debt management, and the result would be a better deal for the American public. He even broached the idea of renegotiating the obligations of the U.S. Treasury.

Well, the day of reckoning has arrived. The Treasury has announced that by the end of September, it will face a shortfall. Without the authority to issue additional debt, the government will not be able to pay all of its bills—including the interest on the outstanding debt. In response, President Trump has threatened the Congress: either fund the wall along the Mexican border, or he will shut down the government.

If the U.S. government fails to meet its obligations for any significant period, we will all be big losers. A government that cares about the people—both now and in the future—would never willingly inflict such a wound.

Donald Trump, Treasury Debt and the Dollar

The time has come to start weighing in on presidential candidate Donald Trump’s statements on economic policy. Today, we examine his comments about U.S. government debt. After saying that he is the “king of debt” and that he “loves debt,” Mr. Trump recently went on suggest that if interest rates were to rise, he would seek to “make a deal” on U.S. Treasury debt. In his words, “I could see long-term renegotiations where we borrow long term at very low rates.” He also called this action: “refinance debt with longer term.”

Mr. Trump appears to assume that his sensibilities as real estate mogul and dealmaker can be directly applied to government debt management policy. They cannot. Treasury securities bear absolutely no resemblance to the debt issued by Trump Entertainment Resorts, which went bankrupt in 1991, 2004, 2009, and 2014...

How big can the U.S. current account stay?

In the past few years, the U.S. current account deficit has shrunk from over 6% of GDP in mid-2006 to less than 3% today. Since these current account deficits reflect capital account surpluses, many people view them as a symptom of the problems that led to the crisis. That is, funds from abroad were fueling the credit boom in the United States, which in turn fed the boom in housing prices, etc.

Over the past three decades the U.S current account has been in surplus only briefly in the first half of 1990. Since then, it has been continuously in deficit. How is it that the United States can keep borrowing without a collapse in the currency or a surge in borrowing costs? Is there some sort of limit?

Commentary

Money, Banking, and Financial Markets