HISTORY OF THE FOREX MARKET: HOW IT ALL BEGAN

BRETTON-WOODS ACCORD

The modern Forex market was established around 1973. But the Bretton-

Woods Accord of 1944, which was established to stabilize the global economy  after World War II, is generally accepted as the original beginning of the foreign exchange market. It created the concept of trading currencies against each other and the International Monetary Fund (IMF). Currencies from around the world were fixed to the U.S. dollar, which in turn was fixed to gold prices in hopes of bringing stability to global Forex events. All currencies were allowed to fluctuate around that value but only within a narrow trading range. Central banks agreed to intervene in the event that their country’s currency moved or threatened to move outside that trading range. If the fixed value of a country’s currency shifted outside that trading range, that country had the right under the articles of the agreement

to declare that a fundamental imbalance is in existence. As a result of this fundamental imbalance, it created a revaluation or devaluation of the country’s currency.

In 1971, the accord finally failed, however, it did manage to stabilize major economies of the world, including those of America, Europe, and Asia.

FREE-FLOATING CURRENCIES

In late 1971 and 1972, two more attempts were made to establish free-floating currencies against the U.S. dollar: the Smithsonian Agreement and the European Joint Float. To “float” a currency simply means to create a policy by which a strong economic currency is used, such as the U.S. dollar (USD), which in turn is anchored to the price of gold as a benchmark (also known as the gold standard) to bring stability to a volatile global economic situation. All other weaker economic currencies are then fixed against the USD and allowed to fluctuate, or float, no more than 1 percent on either side of the fixed rate. If the fixed rate moved more than 1 percent, the central bank of that country was required to intervene in the market until the exchange rate was brought back to within the 1 percent band.

The Smithsonian Agreement and the European Joint Float agreement were similar to the Bretton-Woods Accord but allowed a greater range of fluctuation in the currency values and widened the band in which currencies were allowed to trade.

The Smithsonian Agreement was just a modification of the Bretton- Woods Accord, with allowances for greater fluctuation, whereas the European Agreement aimed to reduce the dependence of European currencies on the U.S. dollar. But after the failure of the three agreements, nations were allowed to peg their currencies to “freely float,” eventually being mandated to do so in 1978 by the IMF. The free-floating system managed to continue for several years after the mandate, yet many countries with weaker currency values incurred major economic devaluation against certain countries that had stronger currency values.

EUROPEAN MONETARY SYSTEM

European currencies were among those most affected by the strength of the

U.S. dollar and the British pound (GBP). In July 1978, the European Monetary

System was created to counter its dependence on the USD. But by 1993, it was clear that this European Monetary System had failed. Shortly thereafter, retail currency trading opportunities as we know them today started to be enjoyed by smaller investors willing to take similar risks as that of banks and large financial institutions.

DEVALUATION

By the late 1990s, stability issues arose in Europe, and major financial

problems erupted in Asia. In 1997, there was a major currency crisis in Southeast Asia, which forced many of the countries’ economic currencies to float. The devaluation of currencies continued in the Asian currency markets, and confidence in trading the open Asian Forex markets began to fail. However, countries with stable currencies, and the concept of trading currencies, remained unchanged.

THE INTRODUCTION OF THE EURO

By this point, the Europeans were already very comfortable with the concept

of Forex trading, but the rest of the world was still unfamiliar. The establishment of the European Union in 1992 gave birth to the euro seven years later in 1999. The euro was the first single currency used as legal tender for the member states of the European Union and became the first currency to rival the historical leaders—the United States, Great Britain, and Japan—in the foreign exchange market by providing financial stability that Europe and the Forex market had long desired.