Outside emerging markets, while the U.S. dollar has maintained its standing as the world’s reserve currency, the eurozone’s share of global forex trading fell markedly. However, this decrease in volume is not singularly attributable to a rise in trade of the U.S. dollar. Looking at the data more closely, the increases in trading have actually been more widely distributed. In 2010, only 15 currencies accounted for more than 1% of overall total trading volume each; today the top 20 most traded currencies account for at least 1% of total volume each. In notional terms, these 20 currencies now trade in excess of $50 billion, on average, each day. When compared to trading volumes of other asset classes such as stock and bonds, this level of interest and liquidity is remarkable.
Although recent performance against the U.S. dollar has resulted in losses for many emerging market currencies, the rise in their importance to global trade is continuing. As many of these countries continue along the path of market liberalization and development, we expect the current trend of financial market globalization to continue. Commensurate with this rise in prominence, currency fluctuations are continuing to be a significant driver of total returns not only in emerging markets but also in the developed world. For many investors, this creates an additional element of complexity when assessing investment opportunities around the world. In our view, it may make sense for investors to take a more proactive, tactical approach in managing their exposure to foreign currencies.
As liquidity continues to increase and investors become more informed, the ability to efficiently access non-traditional asset classes expands their opportunity set. With government policy still having a significant impact on many economies’ future growth trajectories, policy makers are carefully weighing the impact of their decisions on their currencies compared to their trading partners’. In our opinion, investors should be undertaking the same type of analysis when managing exposures in their portfolio
Rick Harper is head of fixed income and currency for WisdomTree Asset Management. This post was republished with permission from the WisdomTree blog.