A brief history of Forex market

On January 19, 2011 | By | In Various

To analyze the history of the foreign exchange market we have to travel from the days of the gold exchange to nowadays through the Bretton-Woods Agreement.

The Bretton-Woods Agreement was established in 1944 and pretended to protect the national currencies against the dollar fixed rate of USD 35 per ounce of gold. Bretton Woods was aimed at establishing international first monetary stability avoiding the speculation in foreign currencies.

The weakness of the gold standard system was its facility to create boom-bust economies. A strengthened economy would import a good deal ending with all the gold reserves required to support its currency; as a result, the money supply would diminish, interest rate would increase and the economic activity would slow down until the point of recession.

The Bretton-Woods Agrement was established just at the end of the World War II to regulate the international Forex market. All the countries involved agreed to maintain their currency value within a narrow margin against the dollar and an equivalent rate of gold. With the agreement, the dollar gained a premium position as a reference currency dominating the Europe and USA markets.

In 1971 the dollar ceased to be exchangeable for gold so the agreement was scrapped. Throughout the 1970s the supply and demand forces were in control of the currencies which began to move freely across borders. Prices were floated daily, with volumes, speed and price volatility all increasing while new financial tools as the market deregulation or trade liberalization emerged.

In 1980, the boom of the computer technology began, increasing the transactions in foreign markets. The capital movements through Asia, Europe and America increased from almost 70 billion dollar a day in the 1980s to more than 2 trillion dollar at the beginning of 2000.

With the rapid development of the Euro/Dollar market (we can define it as US dollars deposited in banks outside the US) the Forex trade market experienced an injection of speediness.  Similarly, Euro markets are those where currencies are deposited outside their country of origin. Both markets are in a leading position nowadays in the Forex trade market.

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