Oct. 16 (Bloomberg) — Foreign-exchange trading is once again fueling revenue at Wall Street banks. It also remains one of their biggest headaches.

Currencies bolstered third-quarter results of bond-trading desks at the three biggest U.S. banks, an unexpected boon as prosecutors weigh charges over allegations that traders rigged foreign-exchange rates.

Fixed-income revenue at Bank of America Corp. surged 11 percent from a year earlier, “driven by strong results” in currencies, the Charlotte, North Carolina-based firm said yesterday. Citigroup Inc. the world’s largest foreign-exchange trader, reported a 5 percent increase, citing improvement in rates and currencies. The gain was 2 percent for JPMorgan Chase & Co. the biggest U.S. bank by assets.

“There was particular strength in currencies,” JPMorgan Chief Financial Officer Marianne Lake said after the New York-based bank reported a $5.57 billion third-quarter profit. She cited the appreciation of the dollar, “the divergence of global monetary policies and just higher levels of overall volatility and client activity.”

JPMorgan and Citigroup are among firms being scrutinized by regulators and prosecutors on three continents amid allegations that dealers at the world’s biggest banks traded ahead of clients and colluded to rig benchmarks. Pension funds and money managers rely on the firms to determine what they pay for foreign currencies.

Stronger Dollar

Lenders are setting aside money to settle claims, shifting more trading to electronic exchanges and overhauling the business to make it harder for dealers to profit from confidential customer information. The scandal may cost firms as much as $15 billion in fines, according to Chirantan Barua, an analyst at Sanford C. Bernstein Ltd. in London.

Trading picked up as the U.S. dollar strengthened against all of its 31 major peers, except China’s yuan, in the past three months, and as Scotland prepared to vote on its independence. Prices have swung, too, as central banks including the Federal Reserve and Bank of England move closer to raising borrowing costs while their peers in Japan and the euro area remain committed to lower rates.

“You look at what’s happening with interest rates across a number of various economies,” said Devin Ryan, a New York-based analyst at investment bank JMP Group Inc. “It’s all tying in to create a more volatile environment for some of the rate-centric products and the currency-centric products,” and that probably will continue in the fourth quarter, he said.

Price Swings

CLS Group Holdings AG, operator of the world’s largest currency-trading settlement system, handled a record $5.94 trillion a day in September, signaling a rebound from a slump in price swings that crimped activity.

Higher revenue from currency trading is a balm for banks that have to set aside more money for anticipated legal costs. JPMorgan reserved about $1 billion in the third quarter because of the foreign-exchange probes, Lake said during a conference call. Citigroup executives, who set aside $951 million for legal costs in the period, declined to elaborate on on how the money would be used.

Goldman Sachs Group Inc. which reports third-quarter results today, and Morgan Stanley, set to report tomorrow, may not have benefited as much from the pickup in currency markets. The two firms ranked outside the top six banks in foreign-exchange trading, according to industry analytics firm Coalition Ltd.

Morgan Stanley Chief Executive Officer James Gorman said in June that his firm had lower aspirations than competitors in the rates- and currency-trading businesses, as the bank cut jobs and assets in those units this year.

Anthony Polini, a New York-based analyst at Raymond James Financial Inc. said he still sees the higher volatility as a boon for Wall Street.

“The good news is it looks like trading activity is going to pick up from here,” he said. “We’re off of the bottom.”

To contact the reporters on this story: Dakin Campbell in New York at dcampbell27@bloomberg.net ; Madeline McMahon in New York at mmcmahon28@bloomberg.net

To contact the editors responsible for this story: Peter Eichenbaum at peichenbaum@bloomberg.net Dan Reichl