As one of the two largest financial markets besides stocks, the foreign exchange market has the outstanding advantage of being the most liquid and accessible in the world. With millions of retail traders, banks and hedge funds participate in the movement of currencies.
So have you ever heard of Forex history? Let's take a look at the events that made the turning point and formed this Forex field.
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Forex History And Connection With Currency History
The birth and development of currency is the foundation for all. According to archeology, the first traces of coins appeared 4,500 years ago in Mesopotamia (present-day Turkey/Iraq) in the form of metal coins.
Foreign exchange appeared around the end of the 18th century when the requirements of many countries and businesses wanted to conduct international commerce without restrictions. Most countries will consider gold or coins from a variety of alloys as the standard conversion.
By the 10th century, the emperors of China, feeling the inconvenience of paying and storing the alloy pieces, issued receipts to accurately show the coin's weight to merchants.
Over the centuries, the court gradually replaced these receipts from circulation and printed banknotes as legal currency, forming the beginning of paper money.
Falling Of The Gold Standard And Formation Of The Forex Market
Forex history wouldn't go on without mentioning the Gold Standard. It is a regime used by many Governments as the basis for the supply of money when the amount of money printed must have the corresponding amount of gold.
In the 1800s, a number of countries adopted the gold standard. However, World War I and II occurred and forced countries to end this regime to serve the war. The fall of the golden era ushered in the next important events that took place in turn for the great development in Forex history.
Highlights Of Forex History
In 1982, spot transactions in the USD and GBP pairs appeared and gradually increased due to the leadership of the British and American economies. Followed by a series of market development events in Forex history are:
1. Bretton Woods System (1944 - 1971)
After World War I, the Great Depression occurred in the 1930s and lasted until World War II. Under these circumstances, the United States, Great Britain, and France met at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire, USA to design a new global economic order, the beginning of a new global economic order. Important events of Forex history.
As the only country not damaged by the war, the United States was chosen as the host and the dollar from a failed currency after the stock market crash of 1929 became the standard currency against which international currencies were compared.
Bretton Wood's method of operation is that the countries under the system will have foreign exchange reserves in the form of a single country's currency, and only that country will actually follow the gold standard system (here, the US). This system allows member countries to save gold because they can use gold or foreign exchange as a means of international payment.
From here, the goal is to create a stable environment for economies to recover on their own by creating a foreign exchange market that can self-regulate by pegging to the USD. At this point, if a country's currency is too high against the USD, the Central Bank of that country needs to sell the currency in exchange for USD, pushing down the value of that currency and vice versa.
Bretton Woods lasted until 1971 because inflation and the growing U.S. trade deficit left the country with not enough gold to support the dollar in circulation. In 1971, President Richard M. Nixon, ended the system and led to the next turn in Forex history.
2. Free-Floating System Appears
The US government believes that this system limits US spending activities because the amount of gold in possession is limited while the demand for money is much larger (including the expansion of the war to Vietnam and Vietnam). many other countries). In 1971, after withdrawing from Bretton Wood, the US floated the dollar.
Another agreement, the Smithsonian in December 1971, was similar, but allowed for a larger range of fluctuations. The US has fixed the USD with gold at 38 USD/ounce, thus reducing the USD price. According to the agreement, other major currencies can fluctuate by 2.25% against USD and USD is fixed to gold. The same mistake as Brett Woods, so the Smithsonian quickly disbanded.
In 1972, European countries tried to get rid of their dependence on the USD by establishing the European Joint Float consisting of West Germany, France, Italy, the Netherlands, Belgium and Luxemburg. The agreement collapsed again a year later. These setbacks led to the official transition to the Floating Rate Mode on a large scale, and Forex history takes another step forward.
** A free-floating rate (or a volatile exchange rate) is an exchange rate regime in which the value of a currency is allowed to fluctuate in the foreign exchange market, not limited by a defined parity and move freely based on the supply-demand relationship between currencies on the market.
3. Plaza Accord
Continuing in the history of Forex, in the early 1980s, the USD price increased quite a lot against other currencies, causing difficulties for countries' exports, leading to a deficit in the US current account and causing inflation. grow big. In response, the US raised interest rates to strengthen the USD and curb inflation.
This seems to work quite well for the United States, but causes debt and economic stagnation in other countries when the USD weighs heavily. As a result, in 1985, the 5 most powerful economies (G5) including the US, UK, France, West Germany and Japan had to send representatives to the Plaza Hotel, New York to find a solution.
Forex history makes a big break with the Plaza Accord - where there are incentives to increase prices for currencies other than USD.
Once again, the USD dropped sharply creating a large price difference that made the first Forex traders. Forex history officially entered the period where “where there is volatility, there is profit”.
4. Establishment Of Euro
After the 2 World Wars, European countries made many treaties to connect and develop more. In January 1999, for the first time since Charlemagne's reign, 11 European countries were united under a single currency. Euro was born in association with the Treaty establishing the European Union (EU) as a currency unit in business and investment markets to enhance European integration and development.
Closing with a strong exchange rate of 1 euro equivalent to 1.17 US dollar on the first trading day, the Euro promises to compete fiercely with the USD in the global economy. As expected, Forex history gave birth to the EURUSD pair that has become a popular currency pair in forex trading ever since.
5. Online Trading
With the development of technology, along with the introduction of the Euro, the currency market after the 1990s became faster and more diversified than ever. A new era in Forex history steps to a new level when the number of individual traders is increasing when not only big banks and funds can trade Forex.
Not to mention, the fact that countries in the Middle East and Southeast Asia are more politically stable has made crude oil trading and more currencies appear, making money flow even more attractive. Exchanges appear more and more, creating increased competition between exchanges, also leading to good liquidity and lower spread fees (the difference between buying and selling prices).
Summary and Future Outlook
Through a stream of Forex history spanning many centuries, today this market has become the top of the largest financial markets. According to a statistical report by the Bank for International Settlements, the average daily Forex trading volume is estimated at US$6.6 trillion, while the total global GDP is US$94 trillion.
That number seems to show no signs of stopping with trading activity getting faster and faster by technology. With that potential, excellent traders know how to draw lessons from Forex history for news viewing and future predictions.