But looking ahead, specialists reckon the biggest challenge to the dollar’s standing as the world’s preferred currency is likely to come from any unforeseen changes in market strategy by China.
In the meantime, the dollar remains No. 1 for international commercial transactions.
The triennial survey, published March 16 and compiled by the Basel, Switzerland-based Bank for International Settlements (BIS), found the daily turnover in the global foreign-exchange market in April 2004 averaged $1.9 trillion, up 58 percent from $1.2 trillion in the same month in 2001.
The survey conducted in April 2004 also found that there were no substantial changes in the currency composition of the turnover.
The dollar was on one side of 88.7 percent of all transactions, down a fraction from 90.3 percent posted in 2001, followed by the euro with 37.2 percent (in 2001, 37.6 percent), the yen, 20.3 percent (22.7 percent in 2001) and the pound sterling 16.9 percent, up from 13.2 percent in 2001.
Moreover, the dollar-euro combination continued to be the most traded currency pair in April 2004 with a daily average of $501 billion, or 28 percent, share of global turnover, followed by the dollar-yen combination with $296 billion, or 17 percent share, and in third place the dollar-sterling with $245 billion, or 14 percent share, the BIS said.
Its publication, “Central Bank Survey of Foreign Exchange and derivatives market activity in April 2004,” concludes that the geographical distribution of foreign-exchange trading did not change substantially in the 2001-04 period — as London and New York remained the top marketplaces.
UK tops in volume
The United Kingdom retained its No.1 ranking as the most active trading center with 31 percent share of global turnover, followed by the United States with 19 percent, up from a 16 percent share three years earlier.
Other major centers included Japan, with an 8 percent global share; Singapore and Germany, with 5 percent each; Hong Kong, 4 percent; and Australia and Switzerland, each 3 percent.
A major destabilization of the dollar, however, probably would occur if China decided to sharply diversify its reserves portfolio away from dollars and toward euros — especially if this triggered a similar shift by other Asian central banks and they rushed to sell dollars, said a senior central bank economist, who spoke on the condition of anonymity.
Such a rush to dump the dollar could reduce its value by 30 percent to 50 percent in a matter of weeks, the source said.
But the effect would depend on when the People’s Bank of China, that country’s central bank, switched its currency preference.
U.S. deficit an issue
Last month, a report by the 55-country U.N. Economic Commission for Europe (ECE), which includes the United States, warned that the Bush administration’s huge current account deficit — mainly financed by large purchases of U.S. government bonds by Asian central banks to limit the appreciation of their currencies against the dollar — exposes the United States to economic risks.
A “sudden and sharp portfolio adjustment,” the ECE cautioned, would be associated with downward pressure on the dollar and risks for overall economic stability.
If China decided to slowly shift its portfolio — the second-biggest in dollar holdings after Japan’s — the impact could be “benign” — if, at that time, the world economy was on a solid growth path, and it might actually result in a 20 percent to 30 percent appreciation of the dollar, especially if the U.S. budget deficit was declining, an international economist said.
Shifts might occur
A move by Beijing to full convertibility of its currency — the yuan, currently pegged at 8.2 yuan per dollar — also could cause “a big explosion” in foreign-exchange markets and derail the present dollar-euro-yen nexus.
Currency specialists think a major confrontation between the United States and North Korea or Iran over the nuclear-weapons standoff could sharply tilt market sentiment against the dollar.
“A lot of [currency] ‘regime changes’ occur during crises,” one specialist said.
The survey said foreign-exchange trading had expanded in the past three years as investors moved out of domestic stocks and bonds, and hedge funds relied more on foreign-currency trading to protect against market risk.
The increase also was fueled by the higher volatility in the markets between 2001 and 2004 and by interest differentials, which encourage “carry” trading or investments in high-interest-rate currencies financed by short positions in low-interest-rate currencies.