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Forex Trading and Currency Exchange: a History in 500 Words

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  • Forex Trading and Currency Exchange: a History in 500 Words

    Forex trading and currency exchange find they first roots in the Bretton Woods Conference of 1944 that aimed at putting into place a system of exchange rate management that, although did not become fully operative until 1959, as a matter of fact
    remained into place until 1971. The main feature of the Bretton Woods system was the obligation for each Country participating at the agreement to adopt a monetary policy that maintained the exchange rate of its currency within a fixed range; in addition, the IMF should have the power to bridge imbalances (temporarily).
    This is exactly what fores is not about: forex trading has at its base a floating currency exchange regime, that is, a model that uses a floating exchange rate at the base of its exchange rate system. How would it be possible to trade foreign currency (forex) imbalances if the rates were de facto fixed or "pegged" against each other?

    But it is indeed the Bretton Woods that allowed currencies (first the dollar against the British pound, and subsequently against other major world currencies) to float by proving that its model -- in which the central government or central bank announces the official value of their currency and then maintains its actual market rate -- was inadequate to the economic reality governing the world economy (and if this was true in 1971 the more so now in 2007).

    Forex trading as we know it and understand it today was thus actually born at the end of the 70s: currency were allowed to float and this represented a giant leap to the precedent system, where the US Dollar was the reserve currency for all Countries and all currencies were linked to the dollar, which in turns was pegged to the gold (at $35 per ounce, for history sake). Forex trading became very quickly a strong force and driver of the economy not just of one single Country, but of the whole World: currencies could be traded by anybody (although not anybody in the sense that we mean today in 2007, that is, the retail forex trader: back at the beginning of forex trading "anybody" meant large banks, central banks, governments, and major multinational corporations) and their value was dictated by current market supply and demand forces.

    As a market influencing the world economy, it should not come as a surprise that forex trading and currency exchange has experienced an exponential growth in volume and value since currencies were allowed to float against each other: specifically, the market turnover per day at the end of the 70s was about US$5 billion, it increased to US$600 billion in 1987, reached the $1 trillion level in 1992, reaching the $3 trillions mark in 2007. The actual volume of forex trading is it however difficult to estimated precisely; nevertheless, what is certain is that the FX market is not yet stabilized (and probably never will) as the full potential of forex trading, bringing unmatched opportunities to forex traders, has still to be discovered -- and exploited -- by millions of retail investors worldwide, willing to take part into the most fascinating world of .