A Brief History of Forex

A Brief History of Forex

In What is Forex by any arons

Forex (FX) is the marketplace for trading currencies.

The Forex market is a venue for currency exchange. Here, Trillions of Dollars are traded every single day. Since its history, Forex has no centralized location.

The Gold Standard

In 1879, $20.67 equals an ounce of gold. This is the Gold Standard. Here, a country’s currency holds a value exchangeable to gold. Hence, paper money can be converted to gold and vice versa.

In the Gold Standard system, the country fixes a price for gold, allowing for the buying and selling of the metal at a specific price.

For instance, if Canada pegs the price of gold at 500 CAD an ounce, the CAD would be 1/500th of an ounce of gold.

Countries stopped using the system in 1933. The American government cut the connection between gold and the USD in 1977. This led to the complete abandonment of the Gold Standard. Fiat money replaced it.

The system uses gold to limit the money issuance. This safeguards the economy against inflation and deflation. It also helps foster a stable economy that promotes generation of jobs.

The Bretton Woods System

The Bretton Woods Agreement (named in light of its venue in New Hampshire) was made in July 1944. It came into full effect in 1958. Its primary goal was to prevent devaluation of currencies.

This promotes economic advancement. The United Nations Monetary and Financial Conference delegation included almost 730 participants that stood for 44 countries.

In the system, gold determines the USD’s value, while the rest of the currencies are tied to it. The Bretton Woods System ended in the 1970s after the White House announced that it won’t be trading gold.

The Beginning of the Free-Floating System

The Bretton Woods System outlined the guidelines for a fixed exchange rate system.

However, in 1967 a devaluation of 14.3% happened. This prompted then President Nixon to leave the Gold Standard in 1971.

In a Free-Floating System, the Forex Market sets a country’s currency rates. This decision is takes cues from supply and demand relations as opposed to a Fixed Exchange Rate wherein the government sets the rate.

In Free-Floating Systems, long-term currency price changes may mean both good economic performance and presence of differentials in interest rates between countries.

Should supply overtake demand, the currency rates fall. However, should demand take the upper hand, the currency rates rise.

Taking short-term actions to the extreme prompts central banks to mediate. Central banks and governments have to take action once currencies rise exponentially or sink devastatingly. 

Establishment of the Euro

Next to the USD, the Euro is the most traded currency. Sixty percent (60%) of the European Union use the Euro.

On January 1, 1999, the currency was named Euro. It was launched as a currency for accounting, replacing the European Currency Unit (ECU). In 2002, Euro coins and notes went into circulation.

Forex Trading in the Internet

Online trading began in the early 2000s. These days, with the internet being on everyone’s fingertips, one is given the opportunity to take advantage of price movements through Contract for Difference (CFD) trading.

A popular form of derivative trading, CFDs pertain to leveraged products. These allow you to open a position for almost a morsel of a trade’s entire value. CFDs do not give one ownership of the asset. Instead, one is allowed to take a position upon speculation whether values will either rise or fall.

Leveraged products are a double-whammy. While it can magnify profit, it can also magnify losses.

The Future of Forex Trading

These days, common folk are already investing time and money in trading. While Forex trading remains to be high-risk, interested individuals pin their hopes on the activity’s big earning potential.

Analysts agree that the Forex market will only continue to grow. More market participants would mean speedy and adaptable reactions to global political, economic, and social events or even natural occurrences. This will also lead to greater market volatility.

More regulations that are stringent will also influence existing market participants and attract more traders. Paid trading platforms, systems, marketing techniques, and trading strategies will only continue to be developed.