The Forex market was formed in 1971 when floating exchange rates started to appear. Unlike currency futures or stock markets, the Forex market operates without a central hub. Trading is conducted via computers and phones from countless locations around the globe. Known as FOREX, this market allows banks, investors, and speculators to trade currencies with one another. The bulk of foreign exchange activity is dominated by spot exchanges involving five key currencies: the US Dollar, British Pound, Japanese Yen, Eurodollar, and Swiss Franc. Moreover, it’s the largest financial market on the planet. For perspective, while the US stock market might handle about $10 billion in a day, the Forex market can reach up to $2 trillion in transactions daily. This market operates 24 hours a day, primarily through the continuous Interbank market. It follows the sun’s path, shifting from the major banking hubs in the United States to Australia and New Zealand, then to Asia and Europe, eventually circling back to the US. Until now, seasoned traders from prominent international commercial and investment banks have largely influenced the FX market. Other participants include large multinational firms, global fund managers, registered dealers, international money brokers, futures and options traders, and private speculators. There are three primary motivations for engaging in the FX market. One is to facilitate real transactions, allowing international corporations to convert foreign currency profits into their home currency. Corporate treasurers and asset managers also participate in the FX market to protect against unwanted future currency price fluctuations. The third and more common reason is to speculate for profit. In fact, it is estimated that currently, less than 5% of Forex trading is linked to actual commercial transactions. The FX market is classified as an Over The Counter (OTC) or ‘Interbank’ market because trades occur directly between two parties, either over the phone or through an electronic network. Unlike stock and futures markets, trading isn’t centralized on an exchange. Forex trading operates around the clock, starting daily in Sydney and then progressing globally to Tokyo, London, and New York. Unlike any other financial market, investors can react to currency changes driven by economic, social, and political events as they happen—day or night.
As for the history of money, it has been a part of human civilization for centuries, initially taking the form of Gold or Silver coins. Goods were swapped either for other goods or for gold, which became the standard for pricing. However, as international trade expanded, moving gold around for trade settlements became impractical, hazardous, and time-consuming. A system was created to allow trade payments to be settled in the seller’s local currency. However, the question arose: how much of the buyer’s currency should equal the seller’s? The solution was straightforward; the value of a currency is influenced by the amount of gold reserves a country holds. Therefore, if Country A has twice the gold reserves of Country B, then Country A’s currency would be worth twice as much in exchange for Country B’s currency. This principle became known as The Gold Standard. By around 1880, The Gold Standard was adopted globally. During World War I, to meet overwhelming financial demands, paper money was printed in excessive amounts beyond what gold reserves could back. This led to a devaluation of currencies and a significant imbalance in countries’ foreign obligations and assets. After World War II, the Allied powers sought solutions to this issue during the Bretton Woods Conference in New Hampshire in 1944. In July of that year, representatives from 45 nations convened at the United Nations Monetary and Financial Conference in Bretton Woods to address Europe’s post-war recovery and various monetary challenges, like fluctuating exchange rates and trade restrictions. Throughout the 1930s, many major economies suffered from erratic currency exchange rates and many countries adopted tight trade policies. In the early 1940s, the U.S. and Great Britain proposed establishing new international financial institutions to stabilize exchange rates and encourage global trade, while also planning for Europe’s recovery to avoid the mistakes made after World War I. The result of the discussions at Bretton Woods was the Bretton Woods Agreement, which aimed to build a post-war international monetary system with convertible currencies, fixed exchange rates, and free trade. The agreement established two key institutions: the International Monetary Fund (IMF) and the World Bank, which was created to provide economic aid for rebuilding post-war Europe. The World Bank’s initial action was granting a $250 million loan to France in 1947. Under the Bretton Woods Exchange System, participating countries could exchange their currencies for U.S. dollars at a fixed rate, and central banks could trade U.S. dollars for gold at a set rate. Essentially, the U.S. dollar replaced the British Pound as the dominant currency, establishing fixed exchange rates based on the U.S. dollar. Additionally, the Bretton Woods Agreement aimed to curb currency competition and foster monetary collaboration among nations. Within the Bretton Woods framework, countries that are part of the IMF committed to a system of exchange rates that could be modified within specified limits relative to the US dollar. Additionally, with IMF approval, these rates could be altered to address significant imbalances.