The Geography of Foreign Exchange Trading: Currencies and International Financial Centres

Abstract

We use data on foreign exchange trading from the Bank for International Settlements for the period 1995-2013 to explore the relationship between the international currency system and the evolution of international financial centres. Drawing on existing literature, our conceptual framework suggests that both the system of currencies and that of financial centres have tendencies towards spatial concentration, but they have limits, and generate overlapping but different geographies. Our empirical analysis shows the forex market as globalised, networked and hierarchical, with a 40% share for the leading centre and currency, a 20% share of the runner-up, and the rest of the market divided among smaller financial centres and currencies. The US dollar, as the vehicle currency in foreign trade and cross-border financial transactions, and London, as the world’s most global financial centre, are both at the heart of the system. In the last 20 years the market has undergone spatial concentration, and seems on course for further concentration, driven by economies of scale, scope and agglomeration. The US subprime and Eurozone crises have done little to change the geography of forex trading. Turnover has boomed and Asia’s share in the market has remained stagnant. New regulation may indeed be contributing to the centripetal forces by adding fixed costs and increasing economies of scale. Nevertheless, geopolitics and geoeconomics may act as a centrifugal force, with the rising status of the Chinese currency in the lead.