History of the Foreign Exchange Market
History of the Foreign Exchange
The idea of exchange has been placed in societies throughout various periods in time. Goods have always been exchanged for items of value. This then evolved into exchanging as a form of payment for goods and services. Below we take a look at the history behind the forex exchange and how it has transformed into the marketplace we know today. If you want to know more about Forex then read our guide on what forex is and how to start trading FX here.
The Gold Standard
The Gold Standard came about in the late 18th century, prior to this, countries were using gold and silver as transaction methods which ultimately affected supply and demand levels for the precious metals. Governments used gold to back up the country’s currency and this was known as the gold reserve. The exchange rate came about to show the difference in ounces of gold between two currencies.
This system eventually disintegrated during the start of World War 1. The major European powers at the time had to prove military strength which was a financial burden and the amount of gold to use a form of exchange was not enough to match the currency governments were trying to print.
Bretton Woods Agreement
Allies came together after the Second World War to introduce a new monetary system – this is now recognised as the Bretton Woods System and is named after the conference held in 1944 to manage international currencies and payment systems.
As a result, the US Dollar against gold was the new exchange rate set, essentially making it the primary reserve currency and the only one that would be backed by gold. This agreement also broke down due to the U.S gold reserves being reduced, this meant that the U.S. struggled to manage and cover the amount of U.S. dollars in reserve by central banks around the world.
Governments around the world started to differentiate between strong and weak currencies at this point. Some currencies at this point had started to depreciate in value especially the US dollar which had ongoing pressures with a large number of payment deficits. In 1971 President Nixon announced to the rest of the world that the U.S. would be shutting its gold window meaning that central banks wouldn’t be able to exchange gold for US dollars. Under the new agreement, currencies could be pegged against the US dollar and could fluctuate by 2.25%. Major countries in Europe tried to move away from this system but eventually, it ended and a switch was made to the free-floating system.
The Euro comes into effect
Following the Maastricht Treaty in 1992, the European Union created what we now know as the Euro currency, as well as coming up with an additional foreign policy. The 90’s really changed what people perceived as the foreign exchange as monetary ideals had evolved, with the internet people could access prices of currencies in a matter of minutes, whereas, previously they would have needed to phone brokers and traders to receive accurate information. More and more currencies were also traded and emerging markets also started to enter the FX space.
FX in the 21st Century
The Forex market is the most liquid market in the world and there are trillions worth of dollars that go through the market on a daily basis. Due to increased price fluctuations that occur on a frequent basis, it has evolved to be quite an attractive market place for people to trade. It’s never been as easy to trade FX as now all that is required is a trading account with a retail broker.
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