How Do UK-Based Foreign Exchange Dealers Think Their Market Operates?

This paper summarises the results of a survey of UK based foreign exchange dealers conducted in 1998. It addresses topics in three main areas: The microeconomic operation of the foreign exchange market; the beliefs of dealers regarding the importance, or otherwise, of macroeconomic fundamental factors in affecting exchange rates; microstructure factors in FX. We find that heterogeneity of traders' beliefs is evident from the results but that it is not possible to explain such disagreements in terms of institutional detail, rank or trading technique (e.g. technical analysts versus fundamentalists). As expected, non-fundamental factors are thought to dominate short horizon changes in exchange rates, but fundamentals are deemed important over much shorter horizons that the mainstream empirical literature would suggest. Finally, market norms' and behavioural phenomena are very strong in the FX market and appear to be key determinants of the bid-ask spread.