London consolidates lead in global foreign exchange markets

Britain's dominant grip on the global foreign exchange market has tightened to such an extent over the past 12 months that almost a third of the world's currency trading transactions now take place in this country.

Average daily turnover on the UK's foreign exchange market reached $1.1 trillion (£587bn) in April 2006, the last month for which figures are available from an annual survey by International Financial Services London (IFSL).

The trade body, which promotes the UK's financial services industry, said this represented 41 per cent growth on the same month in 2005. The UK expanded more quickly than any other foreign exchange market, with the whole of the world market rising in size by 38 per cent last year.

"The rapid growth in the volume of foreign exchange turnover over the past two decades reflects the continuing growth of international trade and expansion in global finance and investment," said Mark Maslakovic, the senior economist at IFSL. "The UK, and London in particular, is by far the largest global market for foreign exchange trading, well ahead of the US and Japan."

This year, deals transacted in London will account for 32.4 per cent of all foreign exchange trading, according to IFSL's analysis. The UK's market share is almost twice as high as the next biggest player, the US, which has 18.2 per cent of all currency trading. Japan, with 7.6 per cent, and Singapore, with 5.7 per cent, are the next most important currency exchange markets but lag considerably behind Western competitors.

The US and Japan have actually lost ground on the UK over the past two years, the IFSL's figures show, with their market shares slipping from 19.2 per cent and 8.3 per cent respectively in 2004. Britain's share has moved up from 31.3 per cent over the same period.

Mr Maslakovic said the UK had developed into the ideal centre for currency trading since Margaret Thatcher's newly elected Conservative government abolished exchange controls in 1979.

Until then, foreign investors were almost entirely prevented from buying sterling unless doing so would benefit Britain's balance of payments figures. UK residents, meanwhile, were not allowed to buy foreign currency for investment purposes, unless the purchases were funded with the sale of existing overseas assets. There were also tight restrictions on UK residents' ability to hold foreign currency in deposit accounts.

Analysts estimate that almost £30bn flowed out of the UK after Mrs Thatcher's decision to drop the controls. However, the liberalisation has subsequently enabled the UK to cash in on its geographical position as a bridge between the US, Europe and the Far East.

IFSL said the UK had a string of additional advantages as a centre for foreign exchange trading. They include: a large fund management sector; a large number of investment banks and brokers; easy access to global markets combined with a tradition of welcoming foreign firms; high-quality professional services; efficient telecoms infrastructure; and the use of the English language.

In addition, Mr Maslakovic said that while some domestic financial services companies believe the City of London is over-regulated, foreign currency traders' "perception [is] of a proportionate approach in the regulatory climate".