The History Of Forex Trading

Currency trading can trace its history back to the middle ages when international merchant banker devised the system of using bills of exchange. It is however changes which have occurred during the twentieth century which have really shaped trading in the global currency market we see today.

In the 1930s the British pound was considered to be the world’s principle trading currency and was the currency held by many countries as their main ‘reserve’ currency. London was also seen as the world’s leading foreign exchange center.

Following the Second World War however the British economy was all but destroyed and so the United States dollar took over as the world’s major trading and reserve currency - a position which it still holds today. This said however there are now a number of other currencies, including the Japanese Yen and the Euro, which are also beginning to be seen as major reserve currencies.

It was also following the Second World War that a number of events took place which have been instrumental in shaping today’s Forex market.

The first of these was the conclusion of the Bretton Woods Accord in 1944 in which the United States, Britain and France agreed that they would stabilize world currency markets by pegging the major world trading currencies to the US dollar (which was itself pegged to the price of gold). This accord held that when the price of a currency fluctuated by more than one percent against the US dollar then the central bank of the country in question had to step in and buy or sell the currency to bring it back into its one percent bracket.

The Accord also spawned the establishment of the International Monetary Fund (IMF) which was designed to produce a stable system for the sale and purchase of currencies and to ensure that international currency transactions were conducted smoothly and in a timely fashion.

The IMF also created a consultative forum aimed at both promoting international co-operation and facilitating the growth of world trade. At the same time it also broke down many of the exchange restrictions which were hindering international trade.

The IMF was also tasked with making financial resources available to member states on a temporary basis where this was felt to be necessary in furtherance of the aims of the IMF. Loans were normally only made only on condition that the government of the country to which a loan was made undertook to make substantial changes to rectify the situation which had given rise to the need for the loan.

Without any doubt however the most significant events as far as the Forex market is concerned was seen when the IMF proposed that currencies should become ‘free-floating’ in 1978. This allowed currencies to be traded at a price which was determined solely by the law of supply and demand and that there was no longer any requirement for currencies to be pegged to the dollar or for central banks to intervene in currency trading. Central banks could of course continue to intervene if they wished to do so, but any intervention would be entirely a matter of choice and would no longer be a requirement as it had been under the Bretton Woods Accord.

The next significant event in the history of Forex trading was the birth of the European Monetary System which effectively came into being in 1979. The European Monetary System got off to something of a shaky start when Britain did not join the system, although she did later participate to a degree by joining the European Monetary System’s exchange mechanism in 1990.

The final major event to affect the Forex market was the establishment of the Euro as the European Union’s single currency in 1998 with eleven member states replacing their national currency with the Euro.

Above all else however it was the free-floating of currencies in 1978 which accelerated the growth of the foreign currency market. Back in 1978 Forex trading displayed a daily turnover of around 5 billion US dollars but, by the turn of this century, that figure had risen to 1.5 trillion US dollars.

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