The value of each currency is now governed completely by the laws of supply and demand. For the first time since WWII there was a (free float) system in place. However, this time there was no new agreement to take its place. Just as their predecessors had failed, these agreements were flawed and subsequently fell apart. This agreement was very similar to Bretton Woods but with a larger band for rate fluctuation. Member nations included West Germany, France, Italy, the Netherlands, Belgium and Luxembourg. In 1972 Europe formed the European Joint Float.
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Not long into this agreement, Europe made its first attempt at breaking free from the Dollar dominated system. Rather than give a 1% margin, greater room for manoeuvre was introduced. The Smithsonian Agreement tried to succeed where Bretton Woods had failed. In addition, the aim of the IMF was to create a consultative forum to promote international co-operation and to facilitate the growth of world trade, while at the same time breaking down exchange restrictions which hindered international trade. The Bretton Woods Accord also set in motion the establishment of the International Monetary Fund (IMF) which was designed to provide a stable system for buying and selling currencies and to ensure that currency transactions could take place smoothly and in a timely fashion. If a fluctuation greater than 1% did occur then the relevant central bank had to enter the market and restore the exchange rate to within the accepted band. This rate was not allowed to fluctuate more than 1% in either direction (higher or lower). All other currencies were pegged to the dollar at a certain rate. Part of this agreement was the Gold Standard which fixed the price of Gold at $35 an ounce. The Accord decided that the US Dollar would become the World benchmark and all other countries would measure the value of their currencies against it. Representatives from the United States of America, Britain and France met at Bretton Woods, New Hampshire with the objective of creating an infrastructure that would allow the rebuilding of the World economy. Until the start of the Second World War, as we said the British Pound Sterling was the World most prominent currency.Īt the end of the Second World War the Worlds economy, with the exception of the United States of America, was in disarray.
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Since the Second World War there have been a number of events which have proved instrumental in shaping todays Forex market.
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This said, there are now a number of other currencies, principally the Yen and the Euro, which are also seen as reserve currencies. However, the Second World War severely damaged the British economy and so the United States dollar took over as the worlds principle trading and reserve currency and retains that position today. As a result, London was also seen as the leading center for foreign exchange.
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History of ForexĪlthough currency trading has a long history dating back to the middle ages, it is the changes that we have seen during the twentieth century which have created the Forex market we see today.ĭuring the first half of the twentieth century the British pound was the worlds principal trading currency and was the currency held by many as their main (reserve) currency. Unlike other financial markets, there is no centralized marketplace for forex, currencies trade over the counter in whatever market is open at that time. stock market trades around $257 billion a day quite a large sum, but only a fraction of what forex trades.įorex is traded 24 hours a day, 5 days a week across by banks, institutions and individual traders worldwide. The foreign exchange market – also known as forex or the FX market – is the worlds most traded market, with turnover of $5.1 trillion per day.* To put this into perspective, the U.S.