A look at trading volumes in the euro

One year after the launch of the euro, it is interesting to gauge its importance as a transactions medium in the foreign exchange market. This role is important because of its implication for the euro’s attractiveness to international investors. To that end, this note analyses information on trading volumes in different foreign exchange market segments. The euro was introduced during a period of subdued FX market activity. Traders’ responses to an informal survey indicate that the overall level of activity in 1999 was lower than in 1998. The fall in FX turnover accompanied a general reduction in financial market liquidity. In addition, it appears that the market share of the euro did not change substantially from that held by the mark in 1998. More specifically, the share of trading in euros against dollars in October 1999 was reported to have roughly matched that of dollar/mark trading in April 1998. Furthermore, the share of euro/yen trading accounts for only a small part of the total market. In the view of many market participants, the low liquidity of the euro/yen market has been a major disappointment. There is also some evidence of a slightly lower share of trading of dollars against yen. One conjecture is that the reduced importance of dollar/yen trading might be a symptom of the diminishing role of yen carry trades after the dramatic exchange rate movements in autumn 1998. Finally, it appears that the trading shares of sterling/dollar and sterling/euro have not changed significantly with respect to 1998.