Who created Forex
Foreign exchange trading, which is the act of exchanging fiat currencies, is said to date back centuries - dating back to Babylonian times. Today, the foreign exchange market is one of the largest, most liquid and most accessible markets in the world, and has been shaped by a number of global events such as Bretton woods and the Gold Standard.
One of the most important things for true forex traders is to understand trading history and the key historical events that have shaped the forex market. The same events can happen again in different forms, but their effects can play the same role. Remember a basic postulate of Technical Analysis: history always tends to repeat itself.
FOREX TRADING HISTORY: Where It Came From
Barter system is the oldest method of exchange and began in 6000 BC, introduced by the tribes of Mesopotamia. Under this system, goods are exchanged for goods. The system then evolved and commodities such as salt and spices became common mediums of exchange. Finally, in the early 6th century BC, the first gold coins were produced and acted as currency. They have the important characteristics of a currency such as ease of portability, durability, divisibility, uniformity, limited supply, and acceptability by the majority of users.
Gold coins are widely accepted as a medium of exchange, but they are quite heavy. In the 1800s, countries adopted the gold standard. The gold standard guarantees that the government will exchange paper money for gold based on its commensurate value. This regime worked until World War I, when European countries had to stop the gold standard to print more money to pay for the war, causing hyperinflation.
The foreign exchange market based on the gold standard took place during this time and the early 1900s. Countries traded with each other because they could convert the currency they received into gold. However, the gold standard failed to hold up during the world wars.
KEY EVENTS FOREX MARKET FOREX
History has witnessed major events that have a great impact on the forex market. Here are some highlights:
Bretton Woods System 1944 - 1971
The first transformation of the foreign exchange market, the Bretton Woods System, took place at the end of the Second World War. The United States, Great Britain and France met at the United Nations Monetary and Financial Conference in Bretton Woods to forge a new global economic order. This site was chosen because at the time, America was the only country that was not damaged by the war. Most of the major countries in Europe are in turmoil. In fact, World War II turned the USD from a failed currency after the stock market crash of 1929, into the standard currency.
The Bretton Woods Pact was established to create a stable market through which the global economies could recover on their own. Thereby creating a foreign exchange market where the exchange rate can be adjusted. An adjustable fixed exchange rate is an exchange rate policy whereby one currency is fixed for another. In this case, the foreign countries will "fix" their exchange rate to the USD. The dollar was pegged to gold, because the US held the largest gold reserves in the world at the time. So other countries will trade in USD (this is also how the US Dollar becomes the reserve currency of the world).
The Bretton Woods Agreement ultimately failed to fix gold to USD because there was not enough gold to support the amount of USD in circulation, as the amount of USD in circulation increased as the government increased lending and spending. In 1971, President Richard M. Nixon, ended the Bretton Woods system, which soon led to the greenback being free-floated against other foreign currencies.
The Beginning of the Free Floating Exchange Rate System
After the Bretton Woods Agreement came the Smithsonian Agreement of December 1971, which was similar to Bretton Woods but with a larger range of variation. The US has fixed the greenback to gold at $38/ounce, thus reducing the greenback's price. Under the Smithsonian agreement, other currencies can fluctuate 2.25% against the USD while the USD is pegged to gold.
In 1972, the European community tried to get rid of its dependence on the USD. Later, the European Joint Float was founded by West Germany, France, Italy, the Netherlands, Belgium and Luxemburg. Both agreements made mistakes like the Bretton Woods Agreement and collapsed in 1973. These failures led to the official transition to a freely floating exchange rate system.
Plaza Agreement
In the early 1980s, the USD appreciated too much against other currencies. This really made it difficult for exports and the current account, specifically, causing the US deficit to reach 3.5% of GDP. In response to the stagnant inflation that occurred in the early 1980s, Paul Volcker raised interest rates to strengthen the greenback (and reduce inflation), indirectly reducing the competitiveness of US industry. on the global export market.
The greenback's strength has left third world nations in debt and shuttered factories because they can't compete with foreign rivals. In 1985, the G-5 group, the most powerful economies in the world including the US, UK, France, West Germany and Japan - sent representatives to a supposed secret meeting at the Plaza Hotel in the city. New York City. News of the meeting leaked, forcing the G-5 to issue a statement encouraging the appreciation of non-USD currencies. This is known as the "Plaza Agreement" and its echoes caused a severe drop in the greenback.
It doesn't take long for traders to realize the profit potential in the forex market. Even with government intervention, there is always a high level of volatility, and where there is volatility, there is profit. This has become clear more than a decade after the fall of Bretton Woods.
The Formation of the Euro
After World War II, Europe created many treaties aimed at bringing the countries of the region closer together. No treaty is bigger and stronger than the 1992 treaty, also known as the Maastricht Treaty, named after the Dutch city where the conference was held. The treaty established the European Union (EU), led to the creation of the Euro, and forged a cohesive whole that includes foreign and security policy initiatives. The treaty has been revised several times, but the formation of the Euro has given European banks and businesses a distinct advantage in eliminating exchange rate risk in a globalized economy. .
Transactions over the Internet
During the 1990s, the money market grew more complex and faster than ever before. Currency - and the way people see it and use it - is changing. A person sitting at home can see an exact price that just a few years ago needed the help of a team of traders, brokers and phones. These advances came during a time when previous divisions gave way to capitalism and globalization (the Berlin Wall and the fall of the Soviet Union).
For forex, things have changed. Currencies that were previously closed due to authoritarian political systems can now be traded. Emerging markets, such as those in Southeast Asia, are flourishing and are attracting capital inflows and currency speculation.
The history of the forex market since 1944 is a good example of how a free market works. In a highly liquid market, spreads have decreased significantly with increased competition among makers and brokers. Individuals who trade in bulk have access to the same price information network created by banks and international traders.
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Today, the forex market is the largest market in the world with more than $6.6 trillion traded in the forex market daily. The forex market is influenced by uncertain and ever-changing factors, resulting in ever-present opportunities for traders.
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