The Foreign Exchange market, often referred to as FX or Forex…
From the early stages of money changers to World War 1, the Forex markets remained fairly stable. After the War, the markets became very volatile as speculative traders jumped onto the scene. When the Great Depression hit and the gold standard was removed, speculating in the Forex market dried up. It didn’t return as a viable money making tool again until the very latter part of the twentieth century. So what happened?
Near the end of WWII, the Bretton Woods Accord was drafted. It was a new economic order that declared the US Dollar as the new benchmark currency. The US Dollar had fallen from grace after the stock market crash of 1929, so this was a rehabilitation for the currency. The Bretton Woods Accord was held in Bretton Woods, New Hampshire, because the USA was one of the only countries that had not been devastated by the War. The Accord established stability and a benchmark so that other countries could re-establish themselves. The Accord also established the International Monetary Fund (IMF) and helped stabilize global economies.
The fixed exchange rate system established by the Bretton Woods Accord allowed major currencies to peg themselves to the US Dollar. Currencies were permitted to fluctuate by one percentage point on either side of a set band. When the currency reached the limit on either side of the standard, the country’s central bank would adjust the inflation rate and bring the currency back in line with the agreement’s standard.
To give the US Dollar a cornerstone to base its value on, it was pegged to the price of gold at $35 per ounce. The pegging of the US Dollar to gold and the international currencies to the US Dollar, brought stability to the Forex market. With very little market volatility, there were limited opportunities for speculators to trade, so the Forex market was far from the day trading market it is today.
The Bretton Woods Accord lasted until 1971, when it was replaced by the Smithsonian Agreement in 1971. The Smithsonian agreement was a floating exchange rate system and allowed for greater fluctuations in the world currencies.
By 1972, West Germany, Italy, Luxemburg, France, Belgium and the Netherlands decided they wanted to reduce their dependence on the US Dollar and drafted the European Joint Float. Although this agreement was similar to the Bretton Woods Accord, it allowed the currencies greater latitude for fluctuation.
When the Smithsonian Agreement and the European Joint Float dissolved in 1973, it ushered in the official floating exchange rate system. This system allowed governments to peg their currencies fully or partially or let them freely float. In 1978 this system was officially adopted.
Europe again tried to distance itself from the US Dollar with the European Monetary System in 1978, but by 1993, it had failed.
Today, currencies move independently of each other giving banks, hedge fund traders, brokers, and individuals the opportunity to profit from the highly volatile market. Akin to the stock market, the Forex market is driven by supply and demand. Each day, an estimated $5 trillion changes hands, giving traders the opportunity to make a profit or suffer a loss. Today’s currency market is similar, in some ways, to the Middle ages, but it’s larger, more accessible to everyone, and offers traders widespread opportunity.