The foreign exchange market is the largest financial market on Earth, and also one of the most misunderstood. In a landmark new research publication, The Currency Book 1, Deutsche Bank's Global Head of FX Research George Saravelos and his team deliver the most comprehensive practitioner-facing synthesis of how currencies actually work, why exchange rates move, and what investors and corporates should do about it. Published September 29, 2026, the report spans market structure, exchange rate determination, FX as an asset class, hedging, and the future of the market itself. The conclusion is pointed: "understanding what moves and shapes exchange rates, and the market through which they are traded, is more important than ever."
FX Is Not Like Other Markets, and That Changes Everything
The team opens with a foundational observation that shapes every chapter that follows. Unlike equities or bonds, currencies complete a staggering range of transactions that have nothing to do with profit-seeking. Drawing on the 2025 BIS Triennial Survey, Saravelos et al. find that approximately 40% of daily FX turnover is profit-seeking under realistic assumptions, while the remaining 60% is liquidity-seeking or transactional. Corporates converting revenues, institutional investors hedging overseas assets, and central banks managing reserves all trade FX for reasons entirely indifferent to returns.
This matters profoundly for how the market prices currencies. As the team explains, "a high share of non-profit-motivated or price-insensitive demand has important implications. If transactional flows are large relative to the capital available to arbitrageurs, prices may then reflect not only expectations of future fundamentals, but also hedging demand, corporate cash flows, reserve-management decisions, benchmark rebalancing, regulation and the balance sheet capacity of intermediaries." In plain terms, the efficient market hypothesis is significantly weaker in FX than most market participants assume, and that weakness is structural, not temporary.
Three Horizons, One Framework
The report's intellectual organizing principle is that exchange rate determination operates across three distinct time horizons, each governed by different forces. In the short run, intraday to a few weeks, order flow, positioning, sentiment, risk appetite, and technical signals dominate. In the medium run, spanning months to a couple of years, interest rate differentials, the monetary policy cycle, relative growth, and capital flows pull currencies toward their long-run anchors. In the long run, meaning several years and beyond, fundamentals reassert themselves through relative prices under Purchasing Power Parity, productivity differentials via the Balassa-Samuelson effect, terms of trade, and net international investment positions.
The research-backed synthesis of these layers is the heart of the report. PPP, the team notes, "is a poor timing tool but a powerful valuation anchor." Carry trades have historically earned positive average returns but are "negatively skewed, perform poorly during volatility and liquidity shocks." For the short run, Deutsche Bank's proprietary CORAX order flow data confirms that different client segments carry meaningfully different information. Real-money flows predict spot for up to about ten days, corporate flows are contrarian near-term, and systematic hedge fund flows show strong mean-reversion in emerging markets.
The Dollar's Structural Dominance and Its Vulnerabilities
One of the report's most timely threads concerns the US dollar's position in the global monetary architecture. The team documents the layered mechanisms sustaining dollar dominance, including invoicing, the convenience yield on Treasuries, the correspondent banking network, and the cross-currency basis. Yet Saravelos et al. also identify structural fragility in this edifice. Dollar correspondent banking faces "growing risk of disruption from faster distributed ledger technology, geopolitical competition, alternative payment systems, and underserved corridors in the Global South." Stablecoins, 99% of which are USD-linked as of 2026, emerge as a key instrument of US strategy to defend dollar primacy in the digital payments era.
The team is careful to frame FX not merely as a financial variable but as a geopolitical one. "The structure of the FX market is not simply a question of how currencies trade, but of who controls the financial infrastructure through which money moves across borders."
Currency Hedging: No Universal Answer
For institutional investors and corporates, the report is direct. There is no universally optimal hedge ratio. The appropriate strategy "depends on the hedger's objective, constraints, underlying exposures and tolerance for cost and risk." Dynamic hedging strategies, informed by carry, momentum, and valuation signals, consistently outperform static hedge ratios. The pool of cross-border foreign ownership of assets is now so large that even modest shifts in aggregate hedge ratios among foreign investors can dominate other flows in the balance of payments. This is a medium-run FX driver that deserves considerably more attention from portfolio managers than it typically receives.
5 Key Takeaways for Advisors and Investors
- FX is structurally inefficient. Sixty percent of turnover is transactional or liquidity-driven, weakening the arbitrage mechanisms that enforce efficiency elsewhere. Persistent deviations from fair value are features of the market, not anomalies.
- Match the analytical tool to the time horizon. PPP and BEER models anchor long-run valuation. Interest rate differentials and capital flows govern medium-run direction. Order flow, positioning, and technicals determine near-term moves.
- The carry trade is real but dangerous. Historically profitable, carry strategies are exposed to sharp, correlated drawdowns in volatility spikes. Position sizing and risk management matter more than entry signals.
- Currency hedging is a portfolio decision, not a transaction. Dynamic, portfolio-aware hedging programs that incorporate signals and account for cross-currency diversification deliver better risk-adjusted outcomes than static full-hedge or unhedged approaches.
- Dollar dominance is durable but not destiny. The structural supports for the USD remain intact. The emergence of stablecoins, CBDCs, and alternative payment rails means the monetary architecture is in active transition. Advisors should monitor developments in cross-border payment infrastructure as a leading indicator of longer-term currency demand shifts.
Footnote:
1 Saravelos, George, Charlie Hyams, Rohini Grover, Mallika Sachdeva, Shreyas Gopal, and Oliver Harvey. The Currency Book. Deutsche Bank Research Institute, 29 Sept. 2026, https://theideafarm.com/wp-content/uploads/2026/09/Deutsche-Bank-The-Currency-Book-Sept-2026.pdf.
