The dollar is one of the two currencies traded in 88.3% of transactions, far ahead of the second-placed currency, the euro (which is one-half of 32.3%). The top four currencies are the same as they were in the 2004 survey (the Swiss franc has been replaced in the top five by the Australian dollar) and the dollar's share has marginally increased in that period (from 88.0%). The UK's share of the OTC foreign exchange market has risen from 32% in 2004 to 43.1% now, while the US' share has fallen from 19.1% to 16.5%.
The fact that the FX market is still, as Brexit approaches, centered on London may at least mean that I don't have to move country again quite yet. There's a lot that should be written about changing nature of the industry and the challenges it - and the City - faces, but that's not today's story, which has two parts. Firstly, that the dollar's dominance is intact and what that means, and secondly that which currencies are used to transact foreign exchange doesn't really correlate very closely with which economies dominate global trade now. In both cases, China looms large.
On the surface, China is a 'loser' in this survey, at least to the extent that ambitions of challenging the dollar (in any make, shape or form) as the dominant global currency, are not being realised very fast. 0.1% of global FX trading took place in China in the last survey, much the same as was the case in 2004. The yuan meanwhile was involved in 0.1% of FX trades in 2004, and has risen to 4.3% now, taking it from 29th to 8th place in the overall rankings. That's progress, but it's still not to a dominant place.
There's no doubt that controlling the world's reserve currency has benefits for the US. For example, long-term capital flows into the US regularly lag the size of the current account deficit, because there are plenty of central bank flows to make up the difference was others try to prevent their currency from appreciating. Of course, the downside to that is evident now, as the dollar is overvalued when the President, at least, wishes it wasn't. More strategically important, is the ability of the US to leverage the dollar's status, for example by imposing fines on any firm which flouts US sanctions and allows dollars to flow in and out of prescribed countries. That allows the US to impose its geopolitical policy on there to a degree that isn't necessarily repaired the other way round. In turn, it irks any in Europe and Asia. Having more clout in Asia in particular, was one reason for the Chinese authorities to promote the use of the yuan in the first place.
What has happened with the euro however, demonstrates clearly how difficult it is to challenge the dollar's status. Back in 1992, the dollar was one-half of 82% of all transaction, while the second-placed Deutsche mark was involved in 39.6%. So the mark, back in 1992, had a bigger share than the euro does now - in second place with 32.3%. Is being in second place, meanwhile, much use? It's hard to see how it really helps the ECB or the Eurozone in general. On that basis, any ambitions that China might have to establish the yuan as a really big part of the FX market, regionally or globally, is a tall order - and might not really be worth the effort.
But the size of the FX market, where, in what instruments and which currencies it takes, isn't the only measure of size that matters.
In another part of the BIS website, you can also find the calculations for real and nominal efective exchange rates, and the trade weights the BIS uses to calculate them. Back in 2004, China's share of global trade was a little below Japan's, and a little above the UK's. The US and the Eurozone were miles ahead of everyone else. Now, China is between the eurozone and the US, in second place in a market dominated by three really big players and a lot of smaller followers-on.
This means that China now has a big weighting in other countries' real effective exchange rates. And so, what happens to the Chinese yuan matters a lot. The table below shows how much of a weight each of the top 5 global currencies has in the effective exchange rates of the others. So, to take a politically-charged example, the pound is an important currency in Europe, with a weighting of 10.5% in the euro's trade-weighted value, but that's nowhere near the importance of the euro to the UK, with its 45% weighting. A major disruption to UK-Eurozone trade can hurt Europe, but would hurt the UK more.
Why does this matter? Because China's currency policy may be becoming less passive (or more passive-aggressive). Between 2004 and 2016 the Chinese allowed the currency to appreciate in real terms by 60%, importing disinflation and exporting inflation to the rest of us. Re-orienting the economy away from exports and towards domestic source software growth played a part. Since mid-2016 however, the yuan has lost about 10% of its real value. That doesn't mean that the value of the currencyhas been manipulated, just that as the economy has slowed and the dollar has appreciated, the Chinese haven't always seen fit to intervene to keep the yuan strong to the same extent as they used to intervene to slow the pace of its appreciation.
The result has been that the other major currencies have all done better, in real effective terms, than a glance at bilateral exchange rates might suggest. The euro isn't as weak as a look at EUR/USD suggests, for example. But for the Chinese authorities, what this brings is clout. What the yuan's value does matters much more at a global level now, than it did before. Which begs another question - which would you rather focus on, the seemingly unattainable goal of grabbing some of the dollar's exorbitant privilege, or how to run your own currency policy to better effect, now that it affects even the biggest economies in the world?
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