Today, the Forex market is a nonstop cash market where currencies of nations
are traded, typically via brokers. Foreign currencies are continually and
simultaneously bought and sold across local and global markets. The value of
traders' investments increases or decreases based on currency movements.
Foreign exchange market conditions can change at any time in response to
real-time events.
The main attractions of short-term currency trading to private investors are:
• 24-hour trading, 5 days a week with nonstop access (24/7) to global
Forex dealers.
• An enormous liquid market, making it easy to trade most currencies.
• Volatile markets offering profit opportunities.
• Standard instruments for controlling risk exposure.
• The ability to profit in rising as well as falling markets.
• Leveraged trading with low margin requirements.
• Many options for zero commission trading.
A brief history of the Forex market
The following is an overview into the historical evolution of the foreign
exchange market and the roots of the international currency trading, from the
days of the gold exchange, through the Bretton-Woods Agreement, to its
current manifestation.
The Gold exchange period and the Bretton-Woods Agreement
The Bretton-Woods Agreement, established in 1944, fixed national currencies
against the US dollar, and set the dollar at a rate of USD 35 per ounce of gold.
In 1967, a Chicago bank refused to make a loan in pound sterling to a college
professor by the name of Milton Friedman, because he had intended to use
the funds to short the British currency. The bank's refusal to grant the loan
was due to the Bretton-Woods Agreement.
Bretton-Woods was aimed at establishing international monetary stability by
preventing money from taking flight across countries, thus curbing speculation
in foreign currencies. Between 1876 and World War I, the gold exchange
standard had ruled over the international economic system. Under the gold
standard, currencies experienced an era of stability because they were
supported by the price of gold.
However, the gold standard had a weakness in that it tended to create boombust
economies. As an economy strengthened, it would import a great deal,
running down the gold reserves required to support its currency. As a result,
the money supply would diminish, interest rates would escalate and economic
activity would slow to the point of recession. Ultimately, prices of
commodities would hit rock bottom, thus appearing attractive to other
nations, who would then sprint into a buying frenzy. In turn, this would inject
the economy with gold until it increased its money supply, thus driving down
interest rates and restoring wealth. Such boom-bust patterns were common
throughout the era of the gold standard, until World War I temporarily
discontinued trade flows and the free movement of gold.
The Bretton-Woods Agreement was founded after World War II, in order to
stabilize and regulate the international Forex market. Participating countries
agreed to try to maintain the value of their currency within a narrow margin
against the dollar and an equivalent rate of gold. The dollar gained a premium
position as a reference currency, reflecting the shift in global economic
dominance from Europe to the USA. Countries were prohibited from devaluing
their currencies to benefit export markets, and were only allowed to devalue
their currencies by less than 10%. Post-war construction during the 1950s,
however, required great volumes of Forex trading as masses of capital were
needed. This had a destabilizing effect on the exchange rates established in
Bretton-Woods.
In 1971, the agreement was scrapped when the US dollar ceased to be
exchangeable for gold. By 1973, the forces of supply and demand were in
control of the currencies of major industrialized nations, and currency now
moved more freely across borders. Prices were floated daily, with volumes,
speed and price volatility all increasing throughout the 1970s. New financial
instruments, market deregulation and trade liberalization emerged, further
stoking growth of Forex markets.
The explosion of computer technology that began in the 1980s accelerated
the pace by extending the market continuum for cross-border capital
movements through Asian, European and American time zones. Transactions
in foreign exchange increased rapidly from nearly $70 billion a day in the
1980s, to more than $2 trillion a day two decades later..
