Important dates in the Forex History

Early 20th Century

Only in the 20th century paper money start regular circulation. This happened by force of legislation,
the efforts of central banks to manage money supplies, and government control of gold supplies.
Within a country, this fiat money is as good as any other form. Internationally, it is not. International
trade has always demanded a money standard accepted everywhere.

Gold and silver provided such a standard for centuries. An official Gold Standard regulated the
value of money for about a century, prior to the start of World War I in 1914.

1929

The dollar has been perceived as more of a has-been, due to the Stock Market Crash and the
subsequent Great Depression.

1930

The Bank for International Settlements (BIS) was established in Basel, Switzerland. Its goals were
to oversee the financial efforts of the newly independent countries, along with providing monetary
relief to countries with temporary balance of payments difficulties.

1931

The Great Depression, combined with the suspension of Gold Standard, created a serious diminution
in foreign exchange dealings.

World War II

Before World War II, currencies around the world were quoted against the British Pound. World
War II crashed the Pound. The only country unscarred by the war was the US. The US dollar
became the prominent currency of the entire world.

1944

The United National Monetary and Financial Conference at Bretton Woods, New Hampshire
discussed the financial future of the post-war world. The major Western Industrialized nations
agreed to a «pegging» of the US Dollar, which in turn was pegged at $35.00 to the troy ounce of
gold. The future was designed to be stable, in part due to the tight governmental controls on currency
values. The US dollar became the world’s reserve currency.

1957

The European Economic Community was established.

1967

At the IMF meeting in Rio de Janeiro, the Special Drawing Rights (SDRs) were created. SDRs are
international reserve assets created and allocated by the IMF to supplement the existing reserve
assets.

1971

The Smithsonian Agreement, reached in Washington, D.C., had a transitional role to the free
floating markets. The ranges of currencies fluctuations relative to the US dollar were increased
from 1 percent to 4.5 percent band. The range of currencies fluctuating against each other was
increased up to 9 percent. As a parallel, the European Economic Community tried to move
away from the US dollar block toward the Deutsche Mark block, by designing its own European
Monetary System.

In the summer of 1971, President Nixon took the United States off the gold standard, and floating
exchange rates began to materialize.

1972

West Germany, France, Italy, the Netherlands, Belgium and Luxembourg developed the European
Joint Float. Member currencies were allowed to fluctuate within 2.25 percent band (the snake),
against each other and 4.5 percent band (the tunnel) against the USD.

1973

The Smithsonian Institution Agreement and the European Joint Float systems collapsed under
heavy market pressures. Following the second major devaluation in the US dollar, the fixed-rate
mechanism was totally discarded by the US Government and replaced by The Floating Rate.

1978

The International Monetary Fund officially mandated free currency floating.

1979

The European Monetary System was established.

1999

January 1st, 1999, the Euro makes its official appearance within the countries members of the
European Union.

2002

January 1st, 2002, the Euro becomes the only currency and replaces all other twelve national
currencies within the European Union and Monetary Market: Belgium, Germany, Greece, Spain,
France, Ireland, Italy, Luxembourg, Netherlands, Austria, Portugal and Finland.

TODAY

Today, supply and demand for a particular currency, or its relative value, is the driving factors in
determining exchange rates.
Decreasing obstacles and increasing opportunities, such as the fall of communism and the dramatic
growth of the Asian and Latin American economies, have created new opportunities for investors.
Increasingly vast amounts of foreign currencies began flowing into other countries banks.

The Euromarket

A major catalyst to the acceleration of Forex trading was the rapid development of the Eurodollar
market; where US dollars are deposited in banks outside the US. Similarly, Euromarkets are those
where assets are deposited outside the currency of origin. The Eurodollar market first came into
being in the 1950s when Russia’s oil revenue - all in dollars - was deposited outside the US in
fear of being frozen by US regulators. That gave rise to a vast offshore pool of dollars outside the
control of US authorities. The US government imposed laws to restrict dollar lending to foreigners.
Euromarkets were particularly attractive because they had far less regulations and offered higher
yields. From the late 1980s onwards, US companies began to borrow offshore, finding Euromarkets
a beneficial center for holding excess liquidity, providing short-term loans and financing imports
and exports.

London was, and remains the principal offshore market. In the 1980s, it became the key center
in the Eurodollar market when British banks began lending dollars as an alternative to pounds
in order to maintain their leading position in global finance. London’s convenient geographical
location (operating during Asian and American markets) is also instrumental in preserving its
dominance in the Euromarket.

History of the Forex

Money, in one form or another, has been used by man for centuries. At first it was mainly Gold or Silver
coins. Goods were traded against other goods or against gold. So, the price of gold became a reference
point. But as the trading of goods grew between nations, moving quantities of gold around places to
settle payments of trade became cumbersome, risky and time consuming. Therefore, a system was
sought by which the payment of trades could be settled in the seller’s local currency. But how much of
buyer’s local currency should be equal to the seller’s local currency?

The answer was simple. The strength of a country’s currency depended on the amount of gold
reserves the country maintained. So, if country A’s gold reserves are double the gold reserves of
country B, country A’s currency will be twice in value when exchanged with the currency of country
B. This became to be known as The Gold Standard. Around 1880, The Gold Standard was accepted
and used worldwide.

During the first WORLD WAR, in order to fulfill the enormous financing needs, paper money was
created in quantities that far exceeded the gold reserves. The currencies lost their standard parities
and caused a gross distortion in the country’s standing in terms of its foreign liabilities and assets.
After the end of the second WORLD WAR the western allied powers attempted to solve the problem
at the Bretton Woods Conference in New Hampshire in 1944. In the first three weeks of July 1944,
delegates from 45 nations gathered at the United Nations Monetary and Financial Conference in
Bretton Woods, New Hampshire. The delegates met to discuss the postwar recovery of Europe
as well as a number of monetary issues, such as unstable exchange rates and protectionist trade
policies.

During the 1930s, many of the world’s major economies had unstable currency exchange rates. As
well, many nations used restrictive trade policies. In the early 1940s, the United States and Great
Britain developed proposals for the creation of new international financial institutions that would
stabilize exchange rates and boost international trade. There was also a recognized need to organize
a recovery of Europe in the hopes of avoiding the problems that arose after the First World War.
The delegates at Bretton Woods reached an agreement known as the Bretton Woods Agreement to
establish a postwar international monetary system of convertible currencies, fixed exchange rates
and free trade. To facilitate these objectives, the agreement created two international institutions:
the International Monetary Fund (IMF) and the International Bank for Reconstruction and
Development (the World Bank). The intention was to provide economic aid for reconstruction of
postwar Europe. An initial loan of $250 million to France in 1947 was the World Bank’s first act.
Under the Bretton Woods Exchange System, the currencies of participating nations could be
converted into the US dollar at a fixed rate, and foreign central banks could convert the US dollar
into gold at a fixed rate. In other words, the US dollar replaced the then dominant British Pound and
the parities of the world’s leading currencies were pegged against the US Dollar. 

The Bretton Woods Agreement was also aimed at preventing currency competition and promoting
monetary co-operation among nations. Under the Bretton Woods system, the IMF member
countries agreed to a system of exchange rates that could be adjusted within defined parities with
the US dollar or, with the agreement of the IMF, changed to correct a fundamental disequilibrium
in the balance of payments. The per value system remained in use from 1946 until the early 1970s.
The United States, under President Nixon, retaliated in 1971 by devaluing the dollar and forcing
realignment of currencies with the dollar. The leading European economies tried to counter the US
move by aligning their currencies in narrow band and then float collectively against the US dollar.
Fortunately, this currency war did not last long and by the first half of the 1970’s leading world
economies gave up the fixed exchange rate system for good and floated their currencies in the
open market. The idea was to let the market decide the value of a given currency based on the
demand and supply of the currency and the economic health of the currency’s nation. This market
is popularly known as the International Monetary Market or IMM. This IMM is not a single
entity. It is the collection of all financial institutions that have any interest in foreign currencies, all
over the world. Banks, Brokerages, Fund Managers, Government Central Banks and sometimes
individuals, are just a few examples.

This is very much the present system of exchange of foreign currencies. Although the currency’s
value is dependent on the market forces, the central banks still try to keep their currency in a
predefined (and highly confidential) fluctuation band. They accomplish this by taking one or more
of various steps.

The International Trade Organization that had been planned in the Bretton Woods Agreement
could not be realized in the form initially envisaged - the US Congress would not endorse it.
Instead, it was created later, in 1947, in the form of the General Agreement on Tariffs and Trade,
which was signed by the US and 23 other countries including Canada. The GATT would later
become known as the World Trade Organization. In recent years, the two international institutions
created at Bretton Woods the World Bank and the IMF have faced a major challenge in helping
debtor nations to get back on stable financial footing.

What is Forex ?

Description of the Forex

The Forex market,  established in 1971, was created when floating exchange rates began to
materialize. The Forex market is not centralized, like in currency futures or stock markets. Trading
occurs over computers and telephones at thousands of locations worldwide.

The Foreign Exchange market, commonly referred as FOREX, is where banks, investors and
speculators exchange one currency to another. The largest foreign exchange activity retains
the  spot exchange (i.e.., immediate) between five major currencies: US Dollar, British Pound,
Japanese Yen, Eurodollar and the Swiss Franc. It is also the largest financial market in the world.
In comparison, the US stock market may trade $10 billion in one day, whereas the Forex market
will trade up to $2 trillion in one single day. The Forex market is an opened 24 hours a day market
where the primary market for currencies is the 24-hour Interbank market. This market follows the
sun around the world, moving from the major banking centres of the United States to Australia
and New Zealand to the Far East, to Europe and finally back to the Unites States.

Until now, professional traders from major international commercial and investment banks have
dominated the FX market. Other market participants range from large multinational corporations,
global money managers, registered dealers, international money brokers, and futures and options
traders, to private speculators.

There are three main reasons to participate in the FX market. One is to facilitate an actual
transaction, whereby international corporations convert profits made in foreign currencies into
their domestic currency. Corporate treasurers and money managers also enter the FX market in
order to hedge against unwanted exposure to future price movements in the currency market. The
third and more popular reason is speculation for profit. In fact, today it is estimated that less than
5% of all trading on the FX market is actually facilitating a true commercial transaction.

The FX market is considered an Over The Counter (OTC) or ‘Interbank’ market, due to the fact
that transactions are conducted between two counterparts over the telephone or via an electronic
network. Trading is not centralized on an exchange, as with the stock and futures markets. A true
24-hour market, Forex trading begins each day in Sydney, and moves around the globe as the
business day begins in each financial center, first to Tokyo, London, and New York. Unlike any
other financial market, investors can respond to currency fluctuations caused by economic, social
and political events at the time they occur - day or night.