History of the Forex Market

History of the Forex Market - InvestGrowRepeat.com

The Foreign Exchange market, or Forex (FX) for short, is the largest financial market in the world with trillions of the world's currencies being exchanged every day. It is made up primarily of the world's central banks and other large financial institutions, which facilitate the exchange of one currency for another.

Unlike many other financial markets, the forex market is decentralized, which means there is no oversight or governing body.

Technically, Forex has historically existed as long as international trade has existed, but the Forex of today is much younger than many know.

Related: Stocks vs Forex: Why Trade Forex?

History of Forex: Pegged Currencies

After World War II, many of the world's economies were very weak, so many currencies were pegged at a fixed exchange rate to the US Dollar in order to help economic growth. This was decided by the Bretton Woods Accord in July 1944.

The US Dollar was likewise pegged at a fixed exchange rate to gold at $35 per ounce.

This pegging strategy prevented currencies from becoming significantly devalued against the strong US Dollar. This also required the US government to maintain sufficient reserves of gold to support the amount of US money in circulation.

History of Forex: The Gold Standard and Closed Market

At this point in history, the US Dollar was truly a gold standard currency, where people could exchange the US currency for an equivalent value of gold. Gold has long been viewed as having intrinsic value, whereas paper money used to be perceived as worthless by itself. However, a lot has changed since the early 1900's.

Up until the 1970's the forex market was considered a closed market, where only large corporations could exchange large quantities of one currency for another for associated business needs.

Individuals could not access the forex market like they can in today's open forex market.

End of the Gold Standard: Floating Currencies

It was President Richard Nixon who ended the gold standard on August 15, 1971 due to the rapid inflation caused by rising gold prices. Investors were exchanging their US Dollars for gold due to the slowing economy, which increased the price of gold and worsened inflation.

However, while the US Dollar became a floating currency immediately, it took a little over a year and a half before the other currencies unpegged their currencies from the US Dollar. Since 1973, the majority of the world's currencies have been a part of the floating system, with the exception of a few that are pegged/managed by their respective governments.

In a free-floating system, currency values are determined purely by supply and demand for those currencies.

History of Forex: The Open Forex Market

Note: Euro did not exist until 1999.

It was around this time in 1972 that the Chicago Mercantile Exchange (CME) began to offer currency trading in the International Monetary Market (IMM) division.

Historically, the Forex market was purely an Over the Counter (OTC) market with no physical location or exchange. Technically, the forex market is still considered an OTC market; however, having currency trading on an exchange eventually turned into the birth of forex market-makers who make it possible for individuals to trade in the forex market today.

As an individual trader, it is impossible for you to trade directly with the forex market. All the major participants are large banks and financial institutions. Therefore, whenever a trader is buying or selling currency pairs, they are actually trading with their broker or dealer, who is a market-maker.

The forex broker/dealer is then the one trading with a bank or financial institution who is actually the one trading directly with the forex market. This fact is why the reputation of the forex broker is important, because they are taking the other side of your trades.

However, without these brokers creating this secondary market, individuals would be unable to trade in forex.

History of Forex: Volume of the Forex Market

The Foreign Exchange market is the largest financial market in the world with trillions of the world's currencies being exchanged every day. Compared to the average daily volume of the New York Stock Exchange (NYSE), which is typically under $1 billion per day, the forex market has over 5,000 times the amount of volume.

Chart: Daily Volume in Billions (USD) of NYSE, NASDAQ, and Forex

Unlike many other financial markets, the forex market is decentralized, which means there is no oversight or governing body. The market participants (central banks) in the forex market self-regulate, which has historically been very successful.

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