Forex trading is among the most popular financial markets globally and has dramatically impacted the trading world.
In the past, making some transactions using electronic gadgets was not impossible, especially for international payments, which led to the silver and gold standard systems. Therefore, the history of Forex is essential to know the trends in the forex exchange market.
History And Evolution Of Foreign Exchange
The lack of technologies made processing international payments difficult. Therefore, I have provided a brief history of the foreign exchange market. Read and find out more.
The first currency exchange started 2500 years ago when Egyptians and Greeks traded goods and currencies in exchange for silver and gold coins.
Modern Time:
Gold Standard System
The gold standard system started in 19. century. This system was established in 1875 among the countries that were using silver and gold as the method of international payments. However, global supply and demand affected international payment platforms because the value of these metals was not stable. After all, it kept on fluctuating. This was when any amount would be converted to the corresponding amount of gold as a standard system. The modern forex trading system developed after The Second World War.
Even though gold had become a recognized monetary value, the World War devastated this system.
However, nowadays, the gold standard system is not used as a standard system, but it plays a crucial role because of its demand; hence, it has been used as an economic indicator because of its long-term interaction with the U.S. dollar.
When Did Forex Start?
The modern forex market was established in December 1971, when the Smithsonian Agreement was announced. In 1971, a new dollar standard was created whereby several industrialized states’ currencies were pegged to the U.S. dollar. U.S. dollars were no longer backed and exchanged for gold.
History of the forex market and how it all began!
Before the Second World War ended, several countries gathered at a convention in Bretton Woods, New Hampshire, to create a more effective system for international payments. This convention, known as the Bretton Woods Conference, was attended by representatives from many nations and led to several important outcomes:
- Forex Exchange Rates: The participants recognized the need to establish a stable system for determining foreign exchange rates. This would help ensure smoother and more predictable international trade.
- U.S. Dollar as Reserve Currency: It was agreed that the U.S. dollar, backed by gold, would become the primary global reserve currency. This decision was based on the strength and stability of the U.S. economy and its currency, making the dollar a vital component of the global financial system.
- Creation of International Agencies: Several international institutions were established to oversee and regulate the global economy. These include:
- The General Agreement on Tariffs and Trade (GATT) aimed to promote international trade by reducing tariffs and other trade barriers.
- The International Monetary Fund (IMF), designed to monitor exchange rates, provide financial assistance to countries in need, and ensure global economic stability.
- The International Bank for Reconstruction and Development (IBRD), which later became part of the World Bank, was created to help rebuild war-torn economies and promote development worldwide.
Relative economic strength in the floating exchange system is perceived as a long-term currency price change and interest rate between different countries. In contrast, short-term currency price changes mean speculations, rumors, and disasters based on daily supply and demand for the currency.
Therefore, central banks can intervene when extreme short-term current price changes and a floating exchange environment exist. That is why the national currency is extremely low or high; they can step in to ensure a balance is always maintained. The country’s economy is negatively affected when the currency is extremely low or extremely high, and in the long run, the country will not be able to trade or pay off pending debts.
Therefore, when this happens, the Central Bank and the government try to develop intervention measures to help move the currency to a more favorable price rate. This ensures that economic trends are stable and maintain their economic power. The good thing with floating exchange rates is that there will be no need for international exchange rates. This is unlike fixed exchange rates, which are based on metallic standards. The currency of a country will depreciate if it has an account deficit.
Additionally, the floating exchange rate is more volatile, using scarce resources to predict it. Allocating substantial resources to predict exchange rate changes exposes the rate risk. If the country has a high population of unemployed personnel or inflation, floating exchange rates can be inappropriate because they might worsen the current situation.
The Electronic Communication Network
Top commercial companies traded in free-floating finance markets because they had a lot of money. Consequently, the Internet and expansion technology have made it possible for investors worldwide to make substantial investments in the forex market. When the brokers stormed into the market, they started placing the electronic communication network instead of their clients, making them sell at a higher price to profit from it.
Retail and small investors interested in forex trading can start trading with a small amount of money by signing up with a good broker. It is essential to know that not all brokers are trusted because the Internet is full of scammers. Therefore, you need to take the Time to find an authentic broker who will help you to grow your account.
The electronic communication network has made forex trading very simple. You can now trade in the comfort of your home regardless of location or time zone. This was introduced in the United States in 1990 to enhance electronic trading. It came about because of fast technological developments and the Internet. Electronic communication networks have made signing up with suitable brokers easy; hence, they favor small traders.
Conclusion
The gold standard system was first used in the foreign exchange market. After that, Bretton Woods was developed after 700 representatives, but it, unfortunately, broke down. This paved the way for the floating exchange rate system, which became popular shortly but followed suit and failed. Therefore, when the technology flourished, an electronic communication network was introduced in 1990, completely changing the international monetary system because of its efficiency in the forex trading world.
Forex has a long history; today, improvements have been made for the good of small and advanced forex traders. All this marks essential events in the history of the forex market. This gives you insight into how the exchange rates have Evolved.
He is an expert in financial niche, long-term trading, and weekly technical levels.
The primary field of Igor's research is the application of machine learning in algorithmic trading.
Education: Computer Engineering and Ph.D. in machine learning.
Igor regularly publishes trading-related videos on the Fxigor Youtube channel.
To contact Igor write on:
igor@forex.in.rs
