Market Brief: Currency trading ranges shrink as markets continue to ignore shutdown risks

Rumours of the dollar’s shutdown-inflicted death have been greatly exaggerated. The greenback is holding firm against its major rivals this morning despite confirmation that the US government will remain crippled into a second week, indicating that traders don’t expect the political impasse to result in any meaningful diminishment in the global appetite for American financial assets. On a week-to-date basis, the pound and euro are up 0.3 percent against the dollar, the Canadian dollar and Mexican peso are down 0.2 percent, and the Australian dollar is sitting on a nice circa-1-percent gain after the Reserve Bank signalled a more cautious pace of easing ahead.

Prediction markets are currently suggesting that the shutdown will last till the end of next week at the earliest, meaning that critical data releases—like this morning’s regularly-scheduled September non-farm payrolls report—could be delayed well into mid October. This has left investors to rely upon deeply-flawed private-sector measures for guidance on conditions in the underlying economy, and suggests to us, at least, that hedgers should be prepared for a series of rapid-fire corrections once more accurate information begins flowing*.

The yen remains the only major currency with a discernible storyline guiding its movements. It has climbed nearly a percentage point against the dollar this week as Shinjiro Koizumi emerged as the clear favourite to replace Shigeru Ishiba in tomorrow’s Liberal Democratic Party leadership contest. Markets judge him more likely to tolerate the Bank of Japan’s cautious tightening, which would help narrow cross-Pacific yield differentials, whereas his chief rival, Sanae Takaichi, has long championed looser policy. Overnight index swaps now price in two rate increases over the coming year, which seems reasonable: although policymakers are clearly committed to normalising Japanese rates, inflation remains largely confined to food, where protectionist policies rather than buoyant demand are likely to blame. For the yen, a decisive shift away from its funding role remains a distant prospect.

In lieu of anything interesting to say on the markets themselves, we thought it might be valuable to highlight some insights from Wednesday’s Triennial Survey from the Bank for International Settlements. The Bank found that global foreign exchange volumes grew another 28 percent between April 2022 and April 2025 to 9.6 trillion per day, again vastly outpacing growth in global gross domestic product as cross-border trade and financial flows continued to expand at a faster pace than underlying output.

Roughly 75 percent of all foreign exchange trading still happens in one of four global trading hubs: the United Kingdom, United States, Singapore, and Hong Kong, and the dollar remains absolutely dominant, appearing on one side of 89 percent of all transactions. Noting that there are two sides to every deal, the euro’s role declined to 28.9 percent in 2025 from 30.6 percent three years earlier, the yen’s share was virtually unchanged, and the pound continued its long decline to 10.2 percent from 12.9 percent previously. The Chinese renminbi and Swiss franc shares rose to 8.5 percent and 6.4 percent, respectively. The stylised network map below illustrates the extent to which trading is concentrated in a small number of markets and across a small number of currencies***.

Participants are also choosing a more diverse set of instruments over time. Although spot and outright forward transactions captured more market share between 2022 and 2025, this was likely skewed during the reference period by the unusual trading action occurring around Donald Trump’s Liberation Day tariff announcements. Swaps continued their growth, and options volumes almost doubled over the three-year time horizon, pointing to increasing demand for more flexible and effective insurance instruments among hedgers and other entities. We expect this trend to continue as global trade and financial flows turn more unpredictable in the years ahead.

*Many have speculated that the shutdown will reduce volatility across financial markets. I think that is a dangerous assumption. As Barry Eichengreen, Romain Lafarguette, and Arnaud Mehl illustrated in one of my favourite papers of all time—2017’s ‘Thick vs. Thin-Skinned: Technology, News, and Financial Market Reaction’—faster and more frequent streams of information tend to lower volatility over time by substituting smaller shocks for larger ones**. Leaving investors in the dark for several weeks and then providing a lot of new data over a relatively-short horizon could trigger meaningful moves across asset classes.

**Experience would suggest that this is also true of inflexible exchange rate regimes like the gold standard, Bretton Woods, and European Exchange Rate Mechanism.

***Note that the lines represent trading in currency pairs, and necessarily under-represent the dollars that are traded in offshore markets without touching the US financial system. I'm not aware of a way to illustrate this more accurately, but am open to suggestions if anyone knows of another method.

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