It is the largest financial market in the world: that for trading currency. Companies that pay for import or export are active on it, central banks that have to keep their reserves up to date, large and small investors speculating on fluctuations in exchange rates.
On average, an average of nearly $ 10,000 billion of currencies goes from one owner to another on this market, the bank for international payments (BIS), the club of central banks, reported last week.
10,000 billion dollars-that is roughly a third of the size of the American GDP in 2024. The global currency markets have grown boisterously: three years ago they were still 28 percent smaller, according to the BIS study.
The rapid growth of this very liquid mega market now leads to worrying: can accidents arise that can cause wider financial instability? This Tuesday, the International Monetary Fund will be called. “The central role of this market in the international monetary and financial system makes it very sensitive to macro-economic events and policy changes-especially if they increase uncertainty,” the IMF writes in the Global Financial Stability Report.
Haven
That uncertainty is enough, lately. Consider the import duties and other trade-limiting measures of the Trump government in the US. Because the currency market is connected to other parts of the financial markets, such as those for shares and bonds, “broader stability risks” can easily arise, according to the report, which was only partially released. Next week the IMF will publish the full version during his annual meeting in Washington.
The currency market has several parts. You can buy and sell currency directly, for example: dollars for euros. This is called the mockerymarket. But you can also cover exchange rate fluctuations, or speculate on it, with all kinds of term contracts (swaps). The more uncertainty there is in the world, the greater the need to cover risks with insurance constructions. The grown demand for this partly explains the recent boisterous growth of the currency markets.
The dollar has been under quite pressure since Trumps, in January
The US dollar is central to this. The dollar was part of 89.2 percent of all traded currencies (dollars against euro, or Swiss franc against pound Sterling, for example), according to the BIS investigation.
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In times of unrest, investors often flee to the US dollar, which is considered a safe haven. This is because the value of the dollar, the worldwide most used reserve point of central banks, is stable. This happened, for example, when the Coronapandemie broke out, in 2020. But in 2025, that dollar is no longer always considered a safe haven: the whimsical action of the Trump government arises uncertainty about the US economy and public finances. In April this year, when the White House announced high import duties for most countries, many investors dumped the dollars.
The dollar has been under quite pressure since Trumps, in January. Compared to a ‘basket’ with other important coins, including the Euro and the Yen, the dollar has become 9.2 percent less since the beginning of this year.
Stricter standards
The IMF sees a special risk of the currency market in the rise of a relatively new group of traders: hedge funds, money market funds and other investment funds. A few years ago, the market was dominated by large banks, but now these ‘non-bank financial institutions’ (NBFIs) are at least as important. These NBFIs, also known as ‘shadow banks’, are also counted as pension funds and insurers. NBFIs do not have to meet the capital requirements that were introduced for the banks after the financial crisis of 2007-2008. Supervisors pay a lot less sharp on these settings than on banks.
That entails risks, the IMF notes. The investment funds often speculate on exchange rate fluctuations with risky transactions funded by debts. They do not have access to the central bank when they have a shortage of liquidity. The IMF speaks of a “structural vulnerability” that can increase the “risk to the system” during volatility. Speculations of investment funds that turn out to be incorrect can lead to large losses, which can also give it a broader confidence in the financial system.
The rise of non-bank players is not only visible on the currency markets, but broadly in the financial markets. The share of NBFIs in global lending has risen from 43 percent in 2008 to almost 50 percent in 2023, according to IMF data. Since 2008, the NBFI sector has doubled in the eurozone in total power. Christine Lagarde, the chief of the European Central Bank, argued last week During a speech In Amsterdam for stricter standards for NBFIs who behave like traditional banks.
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