FX a haven to investors wounded by credit crunch

By Simon Falush - Analysis

LONDON (Reuters) - Financial markets may be going through their toughest time in decades but foreign exchange markets are booming as investors, wary of ailing credit markets, look to the asset class as a way of driving returns.

Investors stung by heavy losses in credit markets are diverting resources into FX trading, pushing trading volumes ever higher toward a daily average of $4 trillion (2.01 trillion pounds) that could be reached by the end of the year.

Merrill Lynch MER.N and Citigroup (C.N) have suffered a combined loss of $42.5 billion in writedowns as a result of exposure to poor quality credit assets, but growing FX revenues have taken some of the sting out of these losses.

Both Citi and Merrill Lynch posted record currency revenues in the first quarter with Merrill Lynch doubling its income compared to the same period last year.

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And while banks may be wary about lending money to investors looking to trade credit-related instruments there are no such qualms about involvement in foreign exchange, helping maintain hedge fund activity in the area strong.

"Banks may not be willing to lend to hedge funds margined against credit instruments but customers are not finding themselves credit constrained (when looking to borrow to funds for) FX trading," said Justyn Trenner, principal of research and advisory analytics group ClientKnowledge.

"There is evidence that customers are picking and choosing who they'll trade their foreign exchange through. The boot has moved onto the other foot. But the underlying interest in the asset class has not diminished in any way," Trenner added.