Other Markets - Foreign Exchange
15-Oct-2025 11:59
IMF says global fx markets vulnerable to increased macrofinancial uncertainty despite deep liquidity
International Monetary Fund has stated that despite deep liquidity, global foreign exchange markets remain vulnerable to episodes of increased macrofinancial uncertainty. Flight to quality and increased demand for hedging during such periods can raise foreign currency funding costs and impair foreign exchange market liquidity, reflected in wider bid-ask spreads and heightened exchange rate return volatility. These pressures may be exacerbated by structural fragilities in the foreign exchange market, including large currency mismatches, concentrated dealer activity, and increased NBFI involvement. Strains in foreign exchange market conditions can spill over into other asset classes, tightening broader financial conditions and potentially posing risks to macrofinancial stability. Moreover, the expansion of foreign exchange trading has heightened settlement risk'the possibility that one party delivers currency without receiving the countervalue. Operational risks to foreign exchange market infrastructure, such as technical failures and cyberattacks, further threaten market functioning.
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