One of the buzz words in investment today is Forex trading. But what exactly is the foreign exchange market (also referred to as the FX, Forex or currency market)? We at Destiny Planners will provide a history of FX trading to help you understand exactly what it is and how it evolved. It may be a little bit boring, but it’s important to have some basic background knowledge of the history of the Forex market so that you know a little bit about why it exists and how it got here. So here is the history of the Forex market in a nutshell:
In 1876, something called the gold exchange standard was implemented. Basically it said that all paper currency had to be backed by solid gold; the idea here was to stabilise world currencies by pegging them to the price of gold. It was a good idea in theory, but in reality it created boom-bust patterns which ultimately led to the demise of the gold standard.
The gold standard was dropped around the beginning of World War 2 as major European countries did not have enough gold to support all the currency they were printing to pay for large military projects. Although the gold standard was ultimately dropped, the precious metal never lost its spot as the ultimate form of monetary value.
The world then decided to have fixed exchange rates that resulted in the U.S. dollar being the primary reserve currency and that it would be the only currency backed by gold, so in 1944 the ”Bretton Woods Accord” was convened. The system was based on the fundamental principle that the US government was obligated to maintain gold reserves equal to the amount of currency in circulation. This in effect created a new gold standard economy – based around the US dollar.
The Accord faced major challenges as gold prices began to rise creating higher levels of inflation into the 1970s. In addition, the pegged currencies nations struggled to manage the value of their own currency. In 1971 the U.S. declared that it would no longer exchange gold for U.S. dollars that were held in foreign reserves, this marked the end of the Bretton Woods Accord. This action ushered in the age of the free-floating currency market and gave rise to the modern- day currency OTC market.
It was this break down of the Bretton Woods Accord that ultimately led to the mostly global acceptance of floating foreign exchange rates in 1976. This was effectively the “birth” of the current foreign currency exchange market, although it did not become widely electronically traded until about the mid-1990s.
Fast forward to today…Technology has led to massive growth in the volume of FX market transactions. Not only are transactions able to take place faster than ever before but a greater number of participants are able to trade in the market. In the past two decades innovations in web-related connectivity and technologies have made it possible for numerous independent brokers to develop internet-based trading platforms. These brokers act as market-makers and provide two-way quotes for each currency pair that they are trading.
Next week “Some terminology used in Forex trading”
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