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1. Looking to the Future.
Where Are Foreign-Exchange Markets Headed?.
Significant strides have been made and will continue
to be made in the development of foreign-exchange
markets. The speed at which transactions are processed
and information transmitted globally will
certainly
lead to greater efficiencies and more opportunities
for foreign-exchange trading. The impact on
companies is that trading costs should come down
and companies should have faster access to more
currencies.
In addition, exchange restrictions that hamper
the free flow of goods and services should diminish
as governments gain greater control over their
economies and liberalize currency markets. Capital
controls still affect foreign investment, but they will
continue to become less of a factor for trade in
goods and services. The introduction of the euro
has allowed cross-border transactions in Europe
to progress more smoothly. As the euro solidifies
its position in Europe, it will reduce exchange-rate
volatility and the euro should be able to take some
of the pressure off the dollar. However, financial crises
in Europe have threatened the very existence
of the euro and its role in global currency markets.
The UK still has not adopted the euro and is even
threatening to leave the EU. Many of the countries in
southern Europe which are under severe economic
pressure are wondering if it is in their best interests
to keep using the euro. However, as the global economy
recovers, these pressures to leave the euro or
the EU will probably dissipate.
The real wild card in global foreign exchange
is the Chinese yuan. As we will discuss in the following
case, the Chinese government continues to
liberalize trading in foreign exchange, but the yuan
is not a freely traded currency. Given that China
has the largest foreign exchange reserves in the
world and is investing all over the world, especially
in the emerging markets that have large deposits
of natural
resources, the RMB has the potential
of becoming a major traded currency. Even
the Brazilian real, the currency of another BRIC
country, is poised to make an impact on currency
markets. However, that depends on what happens
to commodity prices since Brazil is so dependent
on commodity
exports, especially to China. One
trend that could be the wave of the future is currencies
settling with each other rather than through the
dollar. That is now occurring between the RMB and
Brazilian real due to strong trading relationships
between the two countries as Brazil exports commodities
to China, and China exports manufactured
goods to Brazil.
Technological Developments.
2. Technological developments may not cause the
foreign-exchange broker to disappear entirely, but
they will certainly cause foreign-exchange trades to
be executed more quickly and cheaply. The advent
of technology clearly has caused the market to shift
from phone trades to electronic trades.22
It is hard to know how extensive online trading
will become. Numerous companies now advertise
it for investors, but that is not where most of the
trades take place. The growth of Internet trades in
currency will take away some of the market share
of dealers and allow more entrants into the foreignexchange
market. Internet trade will also increase
currency price transparency and improve the
ease of trading, thus allowing more investors into
the market. It is interesting to note that Barclays
Capital, the third largest bank in foreign-exchange
trades, is trying to build its online trading portal by
offering automated exchange tools to financial and
nonfinancial clients. One idea is to offer the system
to their correspondent banks, who can then offer it
to their corporate clients. This is a response to the
fact that foreign-exchange trading is shifting from
telephone to online,23 forcing the banks to offer
more services to clients. Deutsche Bank and UBS,
the top two foreign-exchange traders, are also
expected to expand their proprietary platforms for
e-trading. �