FOREIGN EXCHANGE traders are braced for an unusually volatile end to the year, after a sharp fall-off in volumes signalled that many investors have closed their books early.

Trading floors at investment banks are reporting a drop in demand from major clients - many of which have lost money trading the euro, due to its unexpected strength in the face of deepening debt woes across the region.

Volumes for some currency pairs were up to 30 per cent lower in November than in the previous two months, according to estimates by Citi for the whole market, using data from the EBS trading platform.

“Our volumes are down massively,” said the head of sales at one of the largest banks in the foreign exchange market. “This is very much an early finish to the year.”

Another top-five investment bank estimates its volumes were down up to 15 per cent last month.

Foreign exchange trading normally averages £4 trillion (€4.7 trillion) a day, according to the Bank for International Settlements.

Currency markets have proved unusually difficult to predict in the continuing debt crisis. Intervention from governments around the world to weaken their currencies has surprised markets and made it harder for investors to find havens. Traders said they had been following news headlines more closely, as rumours had caused large swings in the market.

“The sheer amount of newsflow has made it difficult for people to take positions confidently,” said Adam Margolis at Citi. “There’s a real case of headline fatigue.” –

Copyright The Financial Times Limited 2011