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Currency trading and international financial instability

  • Foreign Exchange Market
  • Published:
Intereconomics

Abstract

During the past year, global capital markets have experienced an unprecedented series of financial turmoils. Asian contagion, Russia's default and the collapse of the US hedge fund Long Term Capital Management (LTCM) are the low points of this development. As recent events in Latin America and elsewhere indicate, there is no prospect that markets worldwide will lastingly calm down soon. There is an abundance of proposals and suggestions on how the system should be stabilised. The most popular among them include the control of capital flows and hedge-fund activities. The following article draws attention to another element of financial instability which at times triggers, at times fuels, a crisis: expectation-driven foreign exchange transactions.

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References

  1. For a detailed analysis of the effects of the crisis in Asia see the contributions in: Lukas Menkhoff, Beate Reszat (eds.): Asian Financial Markets—Structures, Policy Issues and Prospects, Nomos, Baden-Baden 1998.

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  2. See Basle Committee on Banking Supervision: Banks' Interaction with Highly Leveraged Institutions, Basle, January 1999, p. 8.

  3. See Robert Chote: Investment Pools ‘Late to Take up Positions’, in: Financial Times, 17 April 1998. And even in the derivatives trade which is dominated by a narrow group of large banks, hedge funds play only a minor role. Compare Laurie Morse and Tracy Corrigan: Bankers Brush Aside Fears of Threat from Derivatives, in: Financial Times, 22 July 1993.

  4. Compare Adrian Hamilton: The Financial Revolution, Harmondsworth 1986, p. 51.

  5. Bank for International Settlements: Central Bank Survey of Foreign Exchange and Derivatives Market Activity 1995, Basle 1996, p. 17.

  6. Bank for International Settlements, op. cit., Central Bank Survey, of Foreign Exchange and Derivatives Market Activity 1995, Basle 1996, p. 18.

  7. Bank of England: The UK Foreign Exchange Market and Over-the-Counter Derivatives Markets in April, 1998, London, 29 September 1998, p. 1.

  8. See also Beate Reszat: The Japanese Foreign Exchange Market, London 1997, p. 48.

  9. Bank for International Settlements, op. cit., Central Bank Survey of Foreign Exchange and Derivatives Market Activity 1995, Basle 1996, p. 18.

  10. See for the detalls Beate Reszat, op. cit., The Japanese Foreign Exchange Market, London 1997, pp. 60 ff.

  11. Compare: Wall Street Blues, in: Financial Times, 2/3 April 1994.

  12. Bank of England, op. cit., The UK Foreign Exchange Market and Over-the-Counter Derivatives Markets in April 1998, London, 29 September p. 4; Federal Reserve Bank of New York: Foreign Exchange and Interest Rate Derivatives Markets Survey Turnover in the United States, New York, 29 September 1998, p. 2.

  13. Federal Roserve Bank of New York, op. cit., Foreign Exchange and Interest Rate Derivatives Markets Survey Turnover in the United States, New York, 29 September 1998, p. 2. Table A5.

  14. See for this and the following Wolfgang H. Reinicke: Global Public Policy—Governing without Government?, Washngton, D.C. 1998.

  15. For the various reactions to the crisis compare Beate Reszat: Asian Financial Markets' Prospects—Attempt at a Symthesis, in: Lukas Menkhoff, Beate Reszat, op. cit., The Japannese Foreign Exchange Market, London 1997, pp. 353–384.

  16. For example, this was the case with Japan in the negotiations which led to the Basle Accord of harmonised capital standards of internationally operating banks. See for the details Beate Reszat, op. cit., The Japannese Foreign Exchange Market, London 1997 pp. 159–161.

  17. Wolfgang Reinicke, op. cit., Global Public Policy—Governing without Government?, Washington, D.C. 1998. p. 64.

  18. Ibid., Wolfgang Reinicke, op.cit., Global Public Policy—Governing without Government?, Washington, D.C. 1998. p. 89.

  19. Compare the interview with Wolfgang Reinicke, in: Politik im globalen Netz, in: Die Zeit, 4 February 1999.

  20. For recent research on the role of chartists and fundamentalists in the market see Helen Allen and Mark Taylor: The Use of Technical Analysis in the Foreign Exchange Market, in: Journal of International Money and Finance, Vol. 11, 1992, pp. 304–14.

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Authors and Affiliations

  1. Hamburg Institute for Economic Research (HWWA), Hamburg, Germany

    Beate Reszat

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  1. Beate Reszat
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Reszat, B. Currency trading and international financial instability. Intereconomics 34, 64–71 (1999). https://doi.org/10.1007/BF02927837

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  • DOI: https://doi.org/10.1007/BF02927837

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