Brief history of forex trading

In the latter stages of World War II, the Bretton Woods agreement was reached on the

initiative of the USA in July 1944. The Bretton Woods Conference rejected John Maynard Keynes

suggestion for a new world reserve currency in favour of a system built on the US dollar. Other

international institutions such as the IMF, the World Bank and GATT (General Agreement on Tariffs

and Trade) were created in the same period as the emerging victors of WW2 searched for a way to

avoid the destabilising monetary crises which led to the war. The Bretton Woods agreement

resulted in a system of fixed exchange rates that partly reinstated the gold standard, fixing the

US dollar at USD35/oz and fixing the other main currencies to the dollar - and was intended to be

permanent.

The Bretton Woods system came under increasing pressure as national economies moved in different

directions during the sixties. A number of realignments kept the system alive for a long time,

but eventually Bretton Woods collapsed in the early seventies following president Nixon's

suspension of the gold convertibility in August 1971. The dollar was no longer suitable as the

sole international currency at a time when it was under severe pressure from increasing US budget

and trade deficits.

The following decades have seen foreign exchange trading develop into the largest global market

by far. Restrictions on capital flows have been removed in most countries, leaving the market

forces free to adjust foreign exchange rates according to their perceived values.

But the idea of fixed exchange rates has by no means died. The EEC (European Economic Community)

introduced a new system of fixed exchange rates in 1979, the European Monetary System. This

attempt
to fix exchange rates met with near extinction in 1992-93, when pent-up economic pressures forced

devaluations of a number of weak European currencies. Nevertheless, the quest for currency

stability has continued in Europe with the renewed attempt to not only fix currencies but

actually replace many of them with the Euro in 2001.

The lack of sustainability in fixed foreign exchange rates gained new relevance with the events

in South East Asia in the latter part of 1997, where currency after currency was devalued against

the US dollar, leaving other fixed exchange rates, in particular in South America, looking very

vulnerable.

But while commercial companies have had to face a much more volatile currency environment in

recent years, investors and financial institutions have found a new playground. The size of

foreign exchange markets now dwarfs any other investment market by a large factor. It is

estimated that more than USD 3,000 billion is traded every day, far more than the world's stock

and bond markets combined.

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