Forex trading, or the act of exchanging fiat currencies, is thought to have existed for centuries, dating back to the Babylonian period. Today, the forex market is one of the world’s largest, most liquid, and most accessible markets, shaped by major global events such as Bretton Woods and the gold standard.
It is critical for forex traders to understand the history of the market and the key historical events that have shaped it. This is because similar events are likely to reoccur in different but similar forms, influencing the trading landscape. History has a tendency to repeat itself.
HISTORY OF FOREX TRADING: WHERE IT ALL BEGAN
The oldest form of exchange is barter, which was first used by Mesopotamian people in 6000 BC. Products were traded for other goods under the barter system. As the system developed, commodities like salt and spices started to be used often as means of exchange. The first-ever form of international trade would include ships sailing to barter for these products. The first gold coins were eventually created, possibly as early as the sixth century BC, and they served as a form of payment because they had important qualities like portability, durability, divisibility, uniformity, limited availability, and acceptability.
Gold coins were frequently used as a form of payment, but their weight made them unworkable. The gold standard was established by nations in the 1800s. The government was obligated by the gold standard to exchange any amount of paper money for its equivalent in gold. This was effective up until World War I, when European nations had to abandon the gold standard in order to increase money printing to fund the conflict.
At this time and in the early 1900s, the gold standard served as the foundation for the foreign currency market. Because they could exchange the money they received for gold, nations traded with one another. However, during the two world wars, the gold standard could not endure.
WHICH KEY EVENTS HAVE SHAPED THE FOREX MARKET?
Major historical occurrences have had a significant impact on the forex trading environment. The following points highlight:
The Bretton Woods System 1944 – 1971
The Bretton Woods System, the first significant adjustment to the foreign currency market, took place near the end of World War II. At the Bretton Woods, New Hampshire, United Nations Monetary and Financial Conference, the US, UK, and France gathered to create a new world economic order. The US was the only nation that had not been affected by war at the time, thus that is why that place was picked. The majority of the major European nations were in ruins. In actuality, World War II transformed the US dollar from a failed currency following the 1929 stock market crisis to the standard currency against which the majority of other foreign currencies were measured.
To build a stable climate in which the world’s economies might recover, the Bretton Woods Accord was founded. . By establishing a flexible pegged foreign exchange market, it made an attempt at this. A currency is tied to another currency under an exchange rate policy known as an adjustable pegged exchange rate. Foreign nations would ‘fix’ their currency rates to the US Dollar in this scenario. Because the US at the time had the largest gold reserves in the world, the US dollar was tied to gold. In order to do business, foreign nations would use the US dollar (this is also how the US dollar came to be known as the world’s reserve currency).
As a result of increased government financing and spending, the Bretton Woods agreement’s attempt to peg gold to the US dollar ultimately failed because there was not enough gold to back the currency’s circulation. President Richard M. Nixon abolished the Bretton Woods arrangement in 1971, which quickly resulted in the US dollar’s free floating versus other currencies.
The Beginning of the Free-Floating System
The Smithsonian Agreement, which was similar to the Bretton Woods Accord but allowed for a wider range of currency fluctuations, followed it in December 1971. The dollar’s value decreased as a result of the United States fixing the exchange rate to gold at $38 per ounce. The US Dollar was tied to gold under the Smithsonian agreement, while other significant currencies were allowed to fluctuate by 2.25% in relation to the US Dollar.
The European community made an effort to reduce its reliance on the US Dollar in 1972. Then, West Germany, France, Italy, the Netherlands, Belgium, and Luxemburg founded the European Joint Float. Both agreements had flaws, much like the Bretton Woods Accord, which led to their collapse in 1973. The free-floating system was officially adopted as a result of these failures.
The Plaza Accord
The dollar had gained significantly versus the other major currencies at the beginning of the 1980s. Exporters were negatively impacted by this, and as a result, the US current account ran at a deficit of 3.5% of GDP. Paul Volcker increased interest rates in response to the stagflation that started in the early 1980s, which weakened the US dollar (and reduced inflation) at the price of the competitiveness of US business in the international market.
Third-world countries were being crushed under the weight of US debt, while American factories were disappearing because they could not compete with international rivals. The G-5, which consists of the United States, Great Britain, France, West Germany, and Japan, are the five most powerful economies in the world. In 1985, the G-5 dispatched officials to what was meant to be a confidential meeting at the Plaza Hotel in New York City. The G-5 was forced to issue a statement encouraging the appreciation of non-dollar currencies when meeting information leaked. The “Plaza Accord” was born out of this, and the ripple effects sent the dollar down.
The potential for profit in this brand-new world of currency trading was quickly realized by traders. There were still significant levels of fluctuation even with government intervention, and where there is fluctuation, there is profit. About ten years after Bretton Woods failed, this became obvious.
the creation of the Euro
Following World War II, Europe drafted numerous accords aimed at fostering regional cooperation. No agreement was more successful than the 1992 Maastricht Treaty, so named after the Dutch city where the meeting took place. The treaty put together a cohesive whole that encompassed initiatives on foreign policy and security while also creating the European Union (EU) and the Euro currency. Despite numerous amendments to the treaty, the creation of the Euro provided European firms and banks with the particular advantage of reducing exchange risk in a rapidly globalizing economy.
Internet trading (online trading)
Because of the changes in money and how people viewed and utilized it, the currency markets became more sophisticated and developed more quickly than ever in the 1990s. A few years ago, an army of traders, brokers, and telephones would have been needed to find an exact price that one person sitting by themselves at home could find with the touch of a button. These communications advancements occurred at a period when capitalism and globalization replaced previous divisions (the fall of the Berlin Wall and the Soviet Union).
Everything changed for forex. Trading in currencies that had previously been prohibited by totalitarian governmental systems was possible. Southeast Asian emerging markets, for example, prospered as a result of capital inflows and currency speculation.
A prime illustration of a free market in action may be seen in the development of FX markets from 1944. Market dynamics have produced an environment of unmatched liquidity. Spreads have significantly decreased as online competition among reliable participants has expanded. The same electronic communications networks that are utilized by international banks and traders are now available to individuals trading huge amounts.
FOREX TRADING TODAY AND IN THE FUTURE
The largest market in the world now is the currency market. The daily volume of trading on the FX market exceeds $5 trillion. The forex market’s uncertain future and constant change present forex traders with enduring prospects.
Forex traders need to keep ahead of the curve if they want to win in a developing market. Pearls of wealth keeps traders up to date with the latest forex events. We also give our working strategies tips.Learn more about forex trading on this article FX market
