What’s getting traded, and where?

The U.S. dollar was involved in 86.3 percent of all forex transactions in April 2007, with the euro next at 37 percent. Both totals are down fractionally from 2004. The Japanese yen (16.5 percent), British pound (15 percent), and Swiss franc (6.8 percent) round out the top five.

The Australian dollar and the New Zealand dollar both had large relative increases (from 5.5 percent to 6.7 percent and from 1 percent to 1.9 percent, respectively), primarily because of their inclusion in many carry trade strategies.

“The carry trade is another big reason currency trading has burgeoned,” Wilkinson says. “In this case, the rise in the demand for basic commodities, fortified by manufacturing demand and a slide in the value of the dollar, has begged the question of how to make money off a mining company in Australia [if you’re an American investor]. Why not take a more leveraged bet on something more liquid through an FX account? It makes perfect sense, whereas researching and locating the right local mining stock might be more difficult.”

The U.S. dollar/euro pair accounted for 27 percent of volume, followed by the dollar/yen (13 percent) and the dollar/ pound (12 percent).

“The recent outflows and redistribution of funds in the USD and JPY have also contributed to the volume surges we are currently witnessing,” says Blake Morrow of GlobalTec Solutions. “The interesting thing to note is that a lot of those funds are being diversified into the AUD and other emerging currencies such as China and India.”

The UK solidified its position as the currency capital of the world, as 34.1 percent of all transactions occurred there — up from 31.3 percent in 2004. The U.S.’s share slipped from 19.2 percent to 16.6 percent. Japan (8.2 percent to 6.0 percent) and Germany (4.9 percent to 2.5 percent) also saw activity drop, while Switzerland (3.3 percent to 6.1 percent) and Singapore (5.2 percent to 5.8 percent) had increases.

Among non-spot transactions, volume in forex options grew 81 percent.

“Volume in foreign exchange options and cross-currency swaps has more than doubled,” Morrow says. “That allows me to conclude that the recent explosion of the FX market has opened the doors to more speculative traders and money than in times past.

“This information is critical to the individual investor because it illustrates the enormous volumes this market is seeing on a daily basis, which results in more speculation.”