Booming Asian forex trade has dollar-settlement risk: research

BASEL, June 17, 2008 (AFP) – Foreign exchange trading in Asian currencies has surged but is being held back by anti-speculation controls and carries time-zone risk through dollar settlement, a research paper at the BIS has found. The authors of the report suggest that trading and risk management would be improved if settlement via the dollar gave way to use of an Asian currency.

The dollar played a role in “about 97 percent” of all cross trading involving Asian currencies in April 2007, the research says.

“The overwhelming use of the US dollar as a vehicle currency heightens the vulnerability of Asian currencies to settlement risk,” according to the paper.

Each step in a foreign exchange transaction is usually settled in the currency’s country of issue, which means that deals involving US dollars can be affected by the considerable time difference between Asian markets and New York.

“One currency might have to be paid before receipt of the other currency can be confirmed,” the authors, Yosuke Tsuyuguchi and Philip Woolridge, say.

“This can result in sizeable, temporary counterparty exposures.”

The paper concludes that “greater use of a regional currency in intra-regional transactions, in place of th