History of Forex Trading

The concept of trading currency is not a new phenomenon, in fact the history can be traced backed to the middle ages when a merchant banker devised a system of using bills of exchange. However it was not until the twentieth century that the system we know as Forex Trading became a truly global currency market.

Barter between individuals was once the preferred means of trading but there were obvious limitations on this system and a more generally accepted means of exchange was introduced in the form of metal coins in particular gold and silver which held their value. In stable political regimes paper form of governmental “I owe you” also gained acceptance, this was the basis of modern currencies.

Pre World War 1 most central banks supported their currencies with gold, although paper money could also be exchanged for gold but did not occur often. There was a tendency for the supply of notes which were not pegged to gold to cause out of control inflation, leading to political instability.

In the 1930's London was seen to be the world's leading trading centre and the British pound was considered to be the world's reserve trading currency. However, following the Second World War the British economy was decimated and the US dollar was transformed from a failed currency after the stock market crash of 1929 to the currency most other currencies were pegged. Post WW2 the US was a thieving economy and emerged as the world's economic power. The US dollar is still considered the leading trading currency closely followed by the Japanese yen and the Euro.

The Brenton Woods Accord

In July, 1944 delegates from 44 allied nations gathered at Mount Washington Hotel in Brenton Woods, New Hampshire for the United Nations Monetary and Financial Conference. The intention of the Brenton Woods Accord was to rebuild the international monetary system after World War 11. The International Monetary Fund and the International Bank for Reconstruction and Development, which today is part of the World Bank Group, were formed.

The major element of the BWA was to develop a financial system where participating countries were obliged to adopt a monetary policy that stabilized the exchange rate of its currency by pegging it to the US dollar which was anchored to the price of gold, using the Gold Standard. When a currency fluctuated 1% in either direction of the standard the respective nation's central bank was obliged to intervene to bring the exchange rate back into the accepted range.

The Brenton Woods Accord marked the beginning and the end of the gold standard. For the first time a currency rather than gold was the international reserve currency. This system stayed in place until 1971 when the United States unilaterally terminated convertibility of the dollar to gold which led to the US dollar becoming the sole reserve currency.

Free Floating Currencies

The most significant event to influence the Forex market came in 1978 when the International Monetary Fund proposed that currencies should become “free floating” This made way for currencies to be traded the same as any commodity, solely by the law of supply and demand without the requirement of the intervention of central banks. This was the beginning of a floating exchange rate system and soon saw markets buying and selling free floating currencies.

The European Monetary System

The EMS came into effect in 1979. This was an arrangement under the Jenkins European Commission where most nations of the European Economic Community agreed to link their currencies to prevent large fluctuations against each other. When the Brenton Woods Accord collapsed in 1971 the European 'currency snake' was adopted. This was an agreement put into place to maintain stable exchange rates by preventing fluctuations of more than 2.25% against the US dollar. The system was unsustainable as it implied much larger fluctuations in which the currencies could move against each other and collapsed in 1973

Under the European Monetary System there was no designated anchor currency, although the Deutsch mark was certainly the centre of the EMS because of its undoubted strength and the low inflation policies of the German central bank. This situation forced the other members of the EMS to follow but caused dissatisfaction in most countries and eventually led to the creation of the euro in 1999

The creation of the Euro

When the European Union was founded in 1957 the member states concentrated on building a common market, however over time it became clear that closer economic and monetary co-operation was needed for the internal market to develop further. A full Economic and Monetary Union with a single currency was not achieved until 1992 when the Maastrict Treaty was signed. This treaty set out the objectives of the EMU; who is responsible for what and what conditions Member States must meet in order to be able to adopt the Euro.

The independent European Central Bank was created to hold all monetary policy responsibility of the Euro and the national central banks of the Member States who adopted the Euro. Fiscal policy remained with individual national governments but they adhere to commonly agreed rules on public finances know as the Stability and Growth Pact.

The Euro has been adopted by 16 European Union countries and is used either formally as legal tender or for practical purpose by many other countries. The Euro has become the second most important international currency after the US dollar and has overtaken the dollar in the value of cash in circulation.

The framework under which the Euro is managed makes it a stable currency with low inflation and low interest rates which encourages sound public finances. Using a single currency increases price transparency, eliminates currency exchange costs, facilitates international trade and gives the EU a more powerful voice in the world.

The greatest influence on the Forex Market

There is no doubt that it was the free floating of currencies in 1978 which accelerated the growth of the foreign currency market as we know it today. Foreign exchange trading has developed into the largest global market dwarfing all other markets combined. It is interesting to note that in 1978 there was a daily turnover of around 5 billion US dollars, now the Foreign Exchange market has a currency turnover of three trillion US dollars daily.

The capital flow restrictions have been removed in most countries which has left the market forces free to adjust foreign exchange rates according to their perceived value.

Although much of the trading activity takes place in London, there is not a single physical location, Forex trading is absolutely a world market. The market is open 24 hours a day from Sunday 20:00 GMT to Friday evening 22:00 GMT. There are always trading opportunities on the Foreign Exchange as the market is constantly moving.

Trading the Forex Markets offers great opportunities but like all high gain endevourers there is also a high risk factor that needs to be considered.  But when you take the time to study and adopt a stragedy you can minimise your loses and enjoy the high earnings that are available as a Forex trader.

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