Exotic currencies see explosive growth: Dealers

Exotic currencies see explosive growth: Dealers

SINGAPORE (Reuter): Offshore trading of Southeast Asian currencies is undergoing explosive growth in Singapore on the back of spectacular volatility and rising investment flows into the region, foreign exchange traders say.

They said in recent interviews with Reuters that up to 90 percent of the trading is speculative in nature -- particularly in the Malaysian ringgit, the Thai baht and the Indonesian rupiah.

"The growth in ringgit spot volumes here has been more than five times over last year," the chief dealer of a major Asian bank in Singapore said.

He said there are now about 10 banks which act as market makers for the ringgit compared with two last year, adding that dealing amounts had also risen sharply.

Banks now regularly deal in orders of US$5 million to $10 million compared with $1 million last year, he said.

Dealers estimate that daily trading volume of the ringgit, including both spot and forward contracts, in Singapore could amount to as much as $3 billion a day.

A senior trader with a British bank in Singapore said real investment in the region is an insignificant part of the foreign exchange flows into this part of the world.

"Most of the flows are short term and speculative in nature," he said.

Dealers said the surge in interest for the ringgit was due to the huge volatility in its exchange rate against the dollar. It has swung from a high of 2.55 ringgit to a low of 2.80 and back to 2.55 against the dollar within the last nine months.

"The moves were engineered by Bank Negara and were not due to any economic fundamentals. This wide range in such a short time has never been seen before and will probably never be seen again," the British bank trader said.

Malaysia's central bank imposed measures to curb speculation in the ringgit, and at the same time depressed the currency, late in 1993 and then removed the measures earlier this year.

"Bank Negara has been instrumental in stirring interest in these markets. The news and changes were good as they moved the currency markets," said the chief dealer with the Asian bank.

Rupiah

Besides the ringgit, dealers said trading interest and volume in the baht and rupiah had also picked up sharply due to interest rate differentials between these currencies and the dollar.

"The play on these two currencies are the interest rates. The recent move by Indonesia to widen the trading band for the rupiah also means more volatility," said a British trader.

Bank Indonesia widened the fluctuation band to 30 rupiah from 20 rupiah for spot dollar buying and selling with the central bank earlier this week.

A senior vice president of regional treasuries for an American bank estimated that Southeast Asian currencies now account for about 15 to 20 percent of daily foreign exchange trading volumes in Singapore.

Daily foreign exchange trading exceeded $80 billion in 1993, he said.

"Singapore is recognized as the major offshore center for these emerging currencies. There are now 20 to 25 banks here who are active market makers and another 70 to 80 banks who trade regularly because of their customer requirements," he said.

He said more banks are jumping onto the emerging currencies bandwagon because they think it may be easier to make money in these currencies compared with trading in the major currencies.

Dealers said most banks still earn the bulk of their foreign exchange profits from trading in major currencies -- like the dollar/mark and dollar/yen -- because of the much larger volumes, but it has been a difficult year in these markets.

"A lot of people have lost money in the majors this year so they are looking to the emerging currencies," said the British trader.