Currency-Trading Revival May Take Years After Slide

July 28 (Bloomberg) -- Currency-trading volumes may take years to recover after a plunge in risk appetite sparked by the global financial crisis drove away hedge funds and speculators, according to foreign-exchange analysts.

Daily trading in London dropped 25 percent in April from a year earlier, with volumes in North America slumping 26 percent, according to surveys released yesterday by the Bank of England and Federal Reserve Bank of New York. Trade in Tokyo slid 16 percent, data compiled by the Foreign Exchange Market Committee in Tokyo showed.

The collapse of Lehman Brothers Holdings Inc. in September sent markets into a tailspin, prompting a flight from higher- yielding assets into currencies considered a refuge such as the dollar and the yen. While risk appetite is reviving on speculation the worst of the recession is over, a return to pre- crisis volumes won’t happen soon, said Geoff Kendrick at UBS AG.

“It’s probably going to be a multi-year adjustment process,” said Kendrick, a strategist in London at the bank, the world’s second-biggest currency trader, according to Euromoney Institutional Investor Plc. “Hedge funds have been impacted the most.”

The drop in London trading was “largely accounted” for by a 28 percent decline in spot trading, the Bank of England said.

U.K. Trading

The dollar was the most heavily traded currency with an 84 percent share of U.K. turnover in April, according to the Bank of England survey. The euro’s share declined to 45 percent from 48.6 in October, while the pound’s proportion was unchanged at 18.7 percent. As two currencies are involved in the transactions, the sum of the proportions totals 200 percent, the bank said.

Foreign-exchange trading rose to $3.2 trillion a day on average in the three years prior to the Bank for International Settlements’ September 2007 triennial survey.

Lower volumes in foreign-exchange markets contributed to bigger price swings as liquidity dropped, according to Ulrich Leuchtmann, head of foreign-exchange research in Frankfurt at Commerzbank AG, Germany’s second-biggest lender.

Currency trading may be reviving, said Satoru Ogasawara, a foreign-exchange analyst and economist at Credit Suisse Group AG, the largest Swiss bank by market value.

“Trade is gradually improving, which should be very supportive of the foreign-exchange market,” said Ogasawara in Tokyo. “The worst period is over and the decline in volume in foreign-exchange trading has hit bottom.”