currency trading has a long history dating back to the middle ages, it
is the changes that we have seen during the twentieth century which have
created the Forex market we see today.
the first half of the twentieth century the British pound was the
world's principal trading currency and was the currency held by many as
their main 'reserve' currency. As a result, London was also seen as the
leading center for foreign exchange. However, the Second World War
severely damaged the British economy and so the United States dollar
took over as the world's principle trading and reserve currency and
retains that position today. This said, there are now a number of other
currencies, principally the Yen and the Euro, which are also seen as
the Second World War there have been a number of events which have
proved instrumental in shaping today's Forex market.
the start of the Second World War, as we said the British Pound Sterling
was the World’s most prominent currency.
end of the Second World War the World’s economy, with the exception of
the United States of America, was in disarray. Representatives from the
United States of America, Britain and France met at Bretton Woods, New
Hampshire with the objective of creating an infrastructure that would
allow the rebuilding of the World’s economy. The result was the Bretton
Accord decided that the US Dollar would become the World’s benchmark and
all other countries would measure the value of their currencies against
it. Part of this agreement was the Gold Standard which fixed the price
of Gold at $35 an ounce. All other currencies were pegged to the dollar
at a certain rate. This rate was not allowed to fluctuate more than 1%
in either direction (higher or lower). If a fluctuation greater than 1%
did occur then the relevant central bank had to enter the market and
restore the exchange rate to within the accepted band.
Bretton Woods Accord also set in motion the establishment of the
International Monetary Fund (IMF) which was designed to provide a stable
system for buying and selling currencies and to ensure that currency
transactions could take place smoothly and in a timely fashion.
addition, the aim of the IMF was to create a consultative forum to
promote international co-operation and to facilitate the growth of world
trade, while at the same time breaking down exchange restrictions which
hindered international trade
also part of the established role of the IMF to make financial resources
available to member states on a temporary basis where this was
considered necessary to further the aims of the IMF. Such loans were
normally only made on the understanding that the country concerned would
make substantial changes to rectify the situation which gave rise to the
need for the loan in the first place.
are mixed opinions as to whether the Bretton Woods Accord was successful
in restoring economic stability to Europe and Japan. Despite this, the
agreement eventually failed in 1971. It was superseded by the
Smithsonian Agreement tried to succeed where Bretton Woods had failed.
Rather than give a 1% margin, greater room for manoeuvre was introduced.
Not long into this agreement, Europe made its first attempt at breaking
free from the Dollar dominated system. In 1972 Europe formed the
European Joint Float. Member nations included West Germany, France,
Italy, the Netherlands, Belgium and Luxembourg. This agreement was very
similar to Bretton Woods but with a larger band for rate fluctuation.
their predecessors had failed, these agreements were flawed and
subsequently fell apart. However, this time there was no new agreement
to take its place. For the first time since WWII there was a ‘free
float’ system in place. The value of each currency is now governed
completely by the laws of supply and demand. Large banks, private
companies and individual speculators are all active participants in the
next major milestone was the establishment of European Monetary System
which effectively came into force in 1979. The European Monetary System
got off to something of a shaky start when Britain (one of the principle
members of the European Community) decided not to join the system and
Italy joined only under special arrangements. Britain did however later
agree to participate to a limited degree by joining the exchange
mechanism of the European Monetary System in 1990.
final major development to affect the Forex market was the establishment
of the Euro as a single currency for European Union member states in
1998 with eleven of the participating states replacing their national
currency with the Euro.
these developments it was the free-floating of currencies in 1978 which
did more than anything else to boost the growth of the foreign exchange
market. In 1978 Forex trading showed a daily turnover of about 5 billion
US dollars and this figure rose in the following ten years to reach 600
billion US dollars by 1988. By 1992 this figure had reached 1 trillion
US dollars, Today The Forex market has is the largest Trading market
with daily turnover of around 2 trillion US dollars.