An answer written last year (May 10, 2010) that is posted here for possible benefit.
Al-hamdu li-llah wa s-salatu wa s-salamu `ala sayyidina Muhammad wa-`ala alihi wa-sahbihi ajma`in.
1. Introduction
Trading across currencies (
al-mutajarah fi'l-umlat) is permissible (tajuz) provided that certain ahkam (norms) and qawa`id (principles) are observed. Observing these ahkam (norms) and qawa`id (principles) is of great importance since failure to do so will result in the commission of riba.
Allah says: <<Ya ayyaha l-ladhina amanu dharu ma baqiya mina r-riba in kuntum mu'minin>>
The
most noteworthy of the ahkam and qawa`id that most be observed when
trading in currencies are ahkam and qawa`id in the area of currency
exchange (sarf), as they apply to contemporary currency exchange. Among
these ahkam and qawa`id are the following:
1. Between sovereign currencies (e.g. US-EUR), exchange must be spot
(immediate). Accordingly, currency futures, currency forwards and other
currency derivative contracts, in which delivery of one or both of the
currencies may occur in the future are impermissible.
2. Between sovereign currencies (e.g. US-EUR), exchange may be in
disimilar amounts. Example: One may exchange 10 AUD for 8.64 USD.
2.1 However, exchange between sovereign currencies (e.g. US-EUR) must be at the market exchange rate that prevails
at time of execution of the exchange.
The basis (
mustanad) of the aforementioned ahkam and qawa`id is qiyas (analogy) on the basic furu` in bab al-sarf and istiqsa' (inductive analysis) of the furu` of bab al-sarf and bab al-riba respectively. Contemporary fuqaha' known for their expertise in the ahkam of modern
financial applications (tatbiqat masrafiyyah mu`asirah) hold that sovereign currencies are analogous to (tuqasu `ala) gold and silver
(al-dhahab wa l-fiddah), including (and this is what concerns us here) when it comes to
exchange across classes (asnaf). The adillah for the aforementioned ahkam are therefore those that the imams of fiqh have mentioned in the mutun in bab al-sarf and bab al-riba.
Now to your question.
1) Trading in currencies with the
expectation that one will profit by taking advantage of the difference
between the purchase price and sales price (i.e. arbitrage) is
permissible provided that the relevant ahkam and dawabit are observed
(see nos 1, 2 and 2.1 above).
2) Leveraging, in currency (and other) markets, typically consists
of borrowing money on interest. This is impermissible. In theory, if one
could borrow without riba (interest or other fees, penalties, etc in
excess of the principal) and then trade (spot) with it, this would be
permissible.
3) The multiplier effect of using leveraged funds to speculate in
currency exposes one to siginificant loses and debt. However, this
potential exposure to loss and debt, in and of itself, does not render
the practice of leveraged speculation impermissible, but rather makruh
according to the sound position (`ala l sahih).
Advice: Since a) the prevailing currency trading platforms and
markets are marred with riba, gharar and various other prohibited
transactions and invalid stipulations, I advise that no one engage in
this activity, except a person who is trained in the fiqh of this domain
and has the wherewithal or financial backing that will allow him to
reasonably expect to be able to cover his possible losses.
It is transmitted that Umar b. al-Khattab (radiya llahu `anhu) said
<Let none approach our markets (to trade therein) except for those
with the appropriate
fiqh, otherwise they will fall into usury (riba), willingly or unwillingly.>
Wa-llahu a`lam.
The neediest slave of Allah,
Taha Abdul-Basser