Forex History

Forex history starts in 1971 when US President Nixon abandoned the fixed currency exchange rate. During the Vietnam War, US had to increase its government expenditure due to the war. This caused inflation to increase. The fixed exchange rate system than in use in accordance with the Bretton Woods System gave dollar the unique position of being the standard currency for the rest of the world. All the other currencies used to be priced relative to dollars.

The dollar was pegged to gold $35 per ounce. The fixed exchange rate system had become the mechanism through which US inflation was being exported to other countries like Germany. Germany had huge dollar reserves due to its export surplus. It tired to stabilize the DM by selling dollars in open markets. This caused the US dollar to lose value. US faced pressure on its gold reserves that were fast depleting. US was not prepared to defend the dollar and ultimately abandoned the fixed exchange rate letting the dollar float freely in the markets.

With the coming of the floating exchange rates, the foreign exchange markets were established and the forex history begins. Now the exchange rate was going to be determined by supply and demand and the economic fundamentals. In the beginning the size of the forex markets were in the range of like $50-60 Billion a day. Forex markets were accessible to big institutions like banks, corporation, hedge funds etc.

But by 1990s with the advent of the internet, the size of forex markets had grown to $3.5 Trillion. In 1998 Retail Spot Forex Trading opened up to the public. Technology advanced faster in the 1990’s than in the entire century before. That meant for the first time, online retail Forex trading became practical. Certain trading companies quickly created Internet-based Forex trading platforms to provide a way for individuals to buy and sell on the Spot Forex market.

This was a short forex history. With the coming of floating exchange rates, there was lot of volatility in the forex markets. In the beginning people didn't know how to deal with this volatility. But over time new financial instruments were designed that took benefit of this volatility and helped in hedging. Forex options is one of the ways to hedge your currency position. Forwards and futures also help in hedging.

The surprising thing about forex markets is that 90% of the traders are trading for pure speculation. Forex markets are the most liquid markets and are open 24/5 except on weekends. With the collapse of the stock markets last year, forex trading is being touted as the Recession Proof Business of 21st century.

Read my other posts to find out how. I hope you have enjoyed this very short introduction to forex history. It was important for you to realize that forex history is only a few decades old and many economic experts are of the opinion that the floating exchange rate mechanism is not good. Maybe in a decade or two another turning point is reached in forex history.