What drives the growth in FX activity?

Earlier this year the Bank for International Settlements published their Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity. The survey reported a massive jump in daily turnover:

Turnover in traditional foreign exchange instruments increased by an unprecedented 71% to $3.2 trillion.

What has been driving this upsurge? The latest BIS Quarterly Review includes a 10 page article which offers an explanation: What drives the growth in FX activity? Interpreting the 2007 triennial survey The three main factors identified by BIS authors Gabriele Galati and Alexandra Heath appear to be hedge funds, portfolio diversification of pension funds, and higher turnover of emerging market currencies:

Two specific findings stand out. First, the growth in transactions between banks and other financial institutions was particularly strong, consistent with the increasing importance of hedge funds, as well as portfolio diversification by institutional investors with a longer-term horizon, such as pension funds. Second, there has been a marked increase in turnover involving emerging market currencies.

The first two are not much of a surprise. The third can be seen as a by-product of the very healthy economic and trade performance of many emerging economies in recent years. In the past many emerging currencies had remarkably low fx turnover for the size of their economies; less so now.

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