IMF: Global Uncertainty Weakens Currency Markets

Striking Analysis on Global Forex Markets from the IMF

The International Monetary Fund (IMF) published an analytical section titled "Risks and Resilience in the Global Forex Market" and a detailed blog post as part of the 2023 Global Financial Stability Report.

Global Forex Market: Key Roles and Issues

The forex market, with a daily transaction volume of over 10 trillion dollars, is the largest and most liquid financial market in the world. It serves as a critical foundation for global trade and finance. However, the IMF points out that the central role of this market in the international monetary and financial system has become more susceptible to macroeconomic fluctuations and policy changes.

The report states that increasing global financial uncertainties generally reduce investors' risk appetite, thereby increasing the demand for safe-haven assets. This situation leads to increased volatility and liquidity issues in the forex markets.

Situation of Emerging Market Currencies

With a remarkable increase in financial uncertainty, it is noted that dollar purchases by investors outside the U.S. have increased. It is recorded that this rise in demand has concentrated particularly among non-bank financial institutions. While these institutions typically have a role in supporting liquidity during normal periods, they pose a risk of increasing market fragility during stress periods.

Sudden fluctuations in exchange rates, widening bid-ask spreads, and rising costs of foreign financing and hedging have become more pronounced in emerging market currencies. Furthermore, it is stated that following the tariffs announced by the U.S. in April, demand for dollars has risen, although this increase is not as sharp as it was during the COVID-19 period.

Stress in Financial Markets and Proposed Solutions

The report indicates that stress in forex markets could spread to other financial assets as well. It emphasizes that operational disruptions and potential cyber attacks could jeopardize liquidity in forex trading platforms. The IMF highlights that policymakers should strengthen their monitoring and oversight processes regarding the factors increasing the fragility of the forex market against adverse market shocks.

In conclusion, it is stated that liquidity stress tests and scenario analyses are important for evaluating funding vulnerabilities among financial institutions.