Forex History

The history of modern Forex begins In 1967, When a Major bank in Chicago refused a college professor , a loan in sterling because he had intended to use the loans to short a short position on the British currency.

Friedman, who had predicted that the pound sterling was valued too high against the dollar, wanted to sell the currency and to buy it back and pay back to the bank his loan after the price of the currency will drop, and by that Making a quick profit to himself . The bank’s refusal to grant the loan was due to the Bretton Woods institutions, established twenty years earlier, which fixed the price of national currencies against the dollar, and set the dollar at a rate of $ 35 per ounce of gold.

The Bretton Woods Agreement, which was signed in 1944, aimed establishing international monetary stability by preventing the leakage of money between nations, and restrict speculation in the currencies markets. Prior to the Agreement, the gold exchange standard-that prevailed between 1876 and the First World War-dominated the international economic system. Under the gold exchange, currencies gained a new phase of stability as they were backed by the price of gold. It abolished the age-old practice used by kings and rulers of arbitrarily lowering the value of money and cause inflation.

But the gold exchange standard did not lack faults. As an economy strengthened, it would import heavily from abroad to deplete its gold required to back their money. As a result, the money supply was reduced, interest rates had risen and economic activity slowed to the extent of recession. In the long run, prices of the goods had reached its lowest point, being attractive to other nations, which was precipitated in the form excessive buying, which injected to the economy with gold until it increase its money supply, lowering the interest rates and recreate wealth in the economy. These boom-bust pattern prevailed during the period of the gold standard until the beginning of World War I interrupted the flow of trade and the free movement of gold.

After the Wars, The Bretton Woods Agreement as be signed , in which the participating countries agreed to try and maintain the value of their currencies with a narrow margin against the dollar and a corresponding rate of gold as needed. It is forbidden to countries devalue their currencies to their trade advantage and were only allowed to do so in the case of devaluations of less than 10%. In the decade of 50, the volume of international trade in constant expansion led to massive movements of capital generated by the post-war construction. That destabilized foreign exchange rates as they had been established at Bretton Woods.

The Agreement was finally abandoned in 1971, and the dollar would no longer be convertible into gold. By the year 1973, the currencies of major industrialized nations began to be trade more freely, controlled primarily by the forces of supply and demand operating in the forex market. Prices are set daily to a free exchange rate, with an increase in volume, velocity and volatility of the same during the 70’s, giving rise to new financial instruments, market deregulation and forex trade liberalization .

In the 80s of the last century , the movement of capital across borders accelerated with the development of computers and technology, extending the market continuity through time zones of Asia, Europe and America. Transactions in foreign exchange rocketed from about $ 70 billion a day in the mid-80, to over $ 1.5 trillion a day two decades later.

The Explosion of the Euromarket

A major catalyst for the acceleration of Forex was the rapid development of the Eurodollar market, in which the dollars were deposited in banks outside the United States. Similarly, Euromarkets possibled assets to be deposited in a currency other than the currency of origin.

On the Eurodollar market first emerged in the 50, when revenues from oil sales by Russia in USD deposited outside the United States in fear of being frozen by the regulatory authorities of the United States . That led to a vast pool of dollars from abroad, Out of reach to control by the authorities of the United States. The United States government imposed laws to restrict dollar loans to foreigners. Euromarkets were particularly attractive because they had far less regulations and offered higher yields. Since the late 80’s and beyond, the American companies began to borrow abroad, finding in the Euromarkets a center where beneficial maintain excess liquidity, providing short-term loans to finance exports and imports.

London was, and remain the largest offshore market. Since 80’s, it became the key center in the Euro/dollar market when British banks began lending dollars as an alternative to pounds in order to maintain their leadership position in global finance. The convenient location of London (which operates at the same time that American and Asian markets) is also crucial to preserving its dominance in the Euro/market.