Foreign exchange trading in emerging currencies: more financial, more offshore

14 March 2011

Foreign exchange turnover evolves in a predictable fashion with increasing income. As income per capita rises, currency trading cuts loose from underlying current account transactions. In parallel, an increasing share of trading in the currency takes place outside the home country. At given income levels, moreover, currencies with either high or very low yields attract more trading, consistent with their role as target and funding currencies in carry trades.

JEL classification:  C82, F31, G12, G15