Basic knowledge of the history of the Forex market helps to gain a better understanding of the current market trends. From the establishment of the Bretton Woods Accord in July 1944, the foreign exchange market has evolved into an extremely sophisticated system and is now the world’s largest market in terms of daily trading volume.
The historic Bretton Woods conference, attended by delegates from the 45 allied powers, resulted in the Bretton Woods exchange rate system. Under this system, the major currencies were pegged to the US dollar, while the US dollar was pegged to gold in an attempt to bring stability to the global Forex situation. Thus the system established the US dollar as a global reserve currency. Foreign central banks were able to exchange dollars in lieu of gold for a fixed rate of $35 per ounce.
Forex Recent History
The Bretton Woods system finally crashed in August 1971, when US President Nixon discontinued the exchange of dollars for gold by the foreign central banks at the fixed rate. Within a span of two years, the fixed-rate system had been abolished entirely and the currencies of Japan and Europe floated, changing on a daily basis on actual demand and supply trends.
Forex trading received a boost from the speedy development of the Eurodollar market, with US dollars being deposited in banks outside the US. Soon the US government regulated dollar lending to foreigners. Euro markets were not regulated as much and offered higher yields and, hence, became more and more attractive.
For several years, international currency trading was limited to large financial corporations and central banks. The Forex market experienced a significant boost in its daily turnover in the 1970s, with free currency trade becoming accessible to individual traders. The daily turnover reached $5 billion in 1977, rising to $600 billion in 1987 and spiraling to $1 trillion in September 1992. The daily trading volume exceeded $3 trillion in 2007.
Rapid technological development in telecommunications and the Internet allowed small and medium corporations and many individual investors to actively participate in and profit from the Forex market. The Forex market is extremely dynamic and changes on an hourly basis, creating profit opportunities. New training programs and readily accessible information have made transactions larger and traders smarter. The popularity of online currency trading for individuals is widening the retail market.