History and Development of the Forex Market and Forex Trading

Like many other technological, economic and sociological innovation, the concept of currency was by the Babylonians. Maritime traders from Middle-east first exchanged one currency for another and facilitated trade. So the birth of forex trading could be traced as early as middle ages when exchange of foreign currencies helped empire economies flourish.

Till 1914 the forex market was stable and without much speculative activity mainly because there was little international trade, and there were only a handful of economies. World War I marked the increased of speculative activity and the market became extremely volatile. The economic downturn and stock market crash in 1929-30 leading to the great depression spread throughout the world affecting the world economies and removing the erstwhile international gold standard.

In the Bretton woods Conference in 1944, it was unanimously decided that each currency would be pegged to dollar and dollar, in turn, would be pegged to gold. Thus the fixed exchange currency system was derived at. This was the period when the forex market went through a series of evolution till 1973.

In 1973 the failure of the Smithsonian agreement signified an official switch to the free floating exchange rate system. This system was mandated by the International Monetary Fund (IMF) 1978. 1973 to 1997 was the period when economies struggled to adjust with the free floating system and the modern forex trading market began to emerge.

However, it was not before 2006 the world saw the buoyant forex market that characterized trading and derivative trading including spread bets and CFDs.

Forex Until 1944

The major economic powers convened the Bretton Woods Agreement in the year 1944 with the aim of bringing in a much needed stability in the international monetary scenario. Prior to this meeting, the international economic and monetary scenario was governed by the gold exchange standard. Between 1876 to the First World War, the gold exchange standard was largely successful in providing stability to international exchange rates as currency values were backed by the value of the gold held by the country’s central bank.

However, the gold exchange standard had its own share of disadvantages. The gold exchange standard depended on the gold stock of a country, and it resulted in alternative periods of boom and bust among all open economies, before World War I disrupted international trade and inhibited movement of gold.

The Bretton Woods Accord

This conference aimed at setting up an International Monetary Fund (IMF) and IBRD (World Bank) as the inventory house of global capital where all the participating nations could subscribe to for funds and loans in times of distress. Another objective of this conference was to stabilize the currency fluctuations by introducing fixed or pegged exchange rates or rather making a single currency strong enough so that other currencies could be compared and valued against that.

Major currencies were now pegged to the U.S. dollar which in turn was pegged to gold. But in spite of all continued efforts the fixed exchange rate was not that widely acceptable in Europe and Japan and failed to bring in currency stability in these two economies.

As a part of the Bretton Woods Accord, major world economies agreed to maintain the value of their currencies within a small range of the Dollar, and not to devalue their currencies to gain trade advantage. However, the post-war resurgence of the world economy was characterized by a massive flow of capital as investments flowed from capital rich countries to cash starved economies. This led to the destabilization of the currency exchange rates as decided in the Bretton Woods Accord.

The Free-floating System

Dependency on the dollar and on gold primarily marked the failure of the pegged exchange system. In 1972 the European communities tried to trim down their dependency on the dollar and launched a joint float system.

In 1973 this system suffered a miserable collapse. The free floating system was officially introduced by default. Governments were now allowed to free float their currencies, peg or semi peg them as they wished. The IMF officially mandated this system of free floating currency exchange in 1978.

The Euro

Although Europeans were already very comfortable with the concept of forex trading, much of the rest of the world were still unfamiliar with the territory. The establishment of the European Union in 1992 gave birth to the euro seven years later, in 1999. The euro was the first single-currency used as legal currency for the member states in the European Union. It became the first currency able to rival the historical leaders in the Foreign Exchange market and create the stability that Europe and the forex market had long desired.

The Forex Markets at the Present Time

At present all the world currencies are independent and move irrespective of the fluctuation in other currencies unless affected by big global phenomena, such as war, that affects many countries simultaneously.

The major currencies are the U.S. dollar, Euro, Pound, Australian, New Zealand & Canadian dollars, and the Yen. Personal trading or speculation at the individual level is allowed even with low margins and without any commissions. The major players in forex trading market are banks, brokerage agencies, hedge funds and individual speculators.

The forex market now has an erratic momentum that influences the value of assets. It is necessary for individual forex traders and trading corporations to have a comprehensive understanding of the foreign exchange market and the forces that impacts the fluctuation in currency values. The market is still evolving and providing with new opportunities in trading options.