Currency Is Place to Make Your Next Fortune

Buzz on The Street:

Usually reluctant to respond to requests for career advice that occasionally find their way into my e-mail box.

There is a move so obvious for anyone finishing college or university this year, or contemplating their next step up the career ladder, that it is worth pointing out.

And right now it is this:

Forget hedge funds, walk away from private equity and tell the derivatives boys they can dump their baffling mathematical formulas in the dustbin under the desk.

Instead, become a currency trader. They are set to become the new kings of the financial markets.

The sovereign-debt crisis, the demise of the dollar and the creation of new reserve currencies all mean that the great financial reputations and fortunes will be made in foreign exchange in the coming few years.

In any decade, one sector of the financial markets is usually dominant. There is one corner of the financial universe where so much new stuff is happening, and it is of such importance to the rest of the world, that it is far easier for a young, ambitious person to make their mark than anywhere else.

In the 1980s, it was mergers-and-acquisitions deals.

In the 1990s, it was the venture capitalist who backed technology companies, and the bankers who arranged initial public offerings for dot-com companies on the stock market.

New Masters

In the 2000s, it was hedge funds, along with the derivatives traders that supplied them with products.

But in the 2010s, it will be currency trading.

There are already plenty of signs that the foreign-exchange markets are hotter than a sunny day on Venus.

Deutsche Bank AG reported last month that its currency- trading platform for retail investors had a 40 percent increase in customer numbers in 2009. Ordinary investors clearly see exchange trading as an area of the market they want to be in.

In London, which is the global currency-trading hub, strong growth is also evident. According to a Bank of England study, daily trading volumes rose 13 percent to $1.43 trillion in October compared with April last year. In the U.S., foreign- exchange trading volumes rose 28 percent to $675 billion a day in the six months ended in October, according to a Federal Reserve-affiliated study. Those are impressive numbers. The volume of London trading isn’t quite back to pre-credit crunch levels, but it is getting close.

Debt Crisis

There are several good reasons for expecting currency trading to be the focus for financial markets this decade.

First, the sovereign-debt crisis. Governments took on huge debt to combat the financial meltdown. That didn’t really fix the problem. It just shifted it from one place to another. Now there are doubts about whether nations can service their obligations. The only way the markets can discipline governments, or pass a verdict on their performance, is via the currency markets. However the crisis eventually works out, it is the foreign-exchange markets that will be in the driver’s seat.

Second, the dollar is in long-term decline. Regardless of how well the U.S. recovers, the rise of new economies such as China, Brazil and India means America won’t be the dominant force in the world that it once was. The result? The dollar’s special status is coming to an end. That may be a good thing after some intense volatility as the world adjusts. Again, it is currency traders who will be in control of that transition.

Store of Value

Third, the advent of new reserve currencies. With the dollar on the way down, the world will need something as a reliable store of value. There are plenty of candidates: It might be gold, an International Monetary Fund-sponsored basket of currencies, or a new world currency. Who knows, it could be something nobody has thought of yet. Ultimately it will be foreign-exchange traders who decide what works and what doesn’t.

You can add into the mix some low-probability, yet high- impact, events. Perhaps Germany will get fed up bailing out Greece and Portugal and leave the euro. Maybe the Chinese will decide to make the yuan the world’s dominant currency. Neither scenario is especially likely, but they would create shockwaves through the markets for years.

There are usually two conditions for one sector of the financial markets to be dominant: There must be lots of innovation, and lots of volatility.

Right now, currency trading ticks both boxes.

That’s why if you work in the markets, figuring out clever ways of swapping euros into yen, and dollars into pounds would be the best thing you could do. It will be the fastest way to make your fortune.