Category:The history of Forex

The history of Forex

Between 1876 and World War 1, the international economic system was governed by the gold exchange standard. A country’s monetary supply would be based on the quantity of gold reserves that they had at their disposal. However, the gold exchange standard was subject to boom-bust patterns and hence was too weak to be sustainable.

In 1944, the Bretton Woods Agreement was made, which helped to establish a fixed exchange rate in terms of gold for major currencies. National currencies were fixed against the dollar, which itself was set at a rate of 35 US dollars per ounce of gold.

The Bretton Woods system was abandoned in 1971 and a floating exchange rate system was adopted. This meant that a currency was set according to supply and demand for that currency relative to other currencies. Floating exchange rates could therefore change freely and were determined by trading on the forex market.

As the development of technology escalated, so the pace at which forex trading could take place grew, and cross border capital movements built up momentum. Transactions in foreign exchange increased intensively from nearly billion dollars a day in the 1980s, to more than $1.9 trillion a day two decades later.

Why do we need a foreign exchange market?

The FX market was created to permit and assist international trade and investment. It enables two countries with different currencies, to trade between themselves, even if they normally trade in an alternative currency i.e. England can trade with America in dollars, America can trade with Japan in the yen and Japan can trade with England in the pound.

Since there is no centralized trading area for the forex market, it is known as an over-the-counter market. It is available globally, 24 hours a day, 7 days a week. Trading starts in Sydney, moves to Tokyo then London and ends up in New York. It is then time to start again in Sydney.