Banks' Foreign-Exchange Revenues Dive After Wrong Guessing on Dollar's Strength
NEW YORK -- The risk of currency forecasting is nowhere more apparent then in the foreign-exchange trading rooms of the nation's leading banks.</br></br>A vast majority of these banks bet the U.S. dollar would weaken, or at least stabilize, in the second quarter, after its precipitous rise against other major foreign currencies at the start of the year. Instead, the dollar -- buoyed by the nation's booming economy and high U.S. interest rates that make dollar-denominated investments look especially attractive -- rocketed.</br></br>Figures released this week by the top seven U.S. banks that have foreign-exchange operations show that forex trading has become an important profit center at many major banks, accounting in some instances for between 5% and 10% of their revenue -- at least in a good year.</br></br>But four of the seven banks had sizable declines in revenue from foreign-exchange operations in the second quarter. A fifth, J.P. Morgan & Co., had a loss of $12.9 million on foreign-exchange operations, the most sizable by any major bank in the past several years. Only two banks said their second-quarter revenue from foreign-exchange operations had risen.</br></br>Some of these same banks also had sizable earnings declines on bond-trading operations. Citicorp, the nation's largest bank holding company, for instance, had an overall second-quarter earnings decline of 2% because of problems in both its foreign-exchange and bond-trading operations.