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Today, the “Forex” market is a nonstop cash market where currencies of nations are traded, typically via brokers. Foreign currencies are continually and simultaneously bought and sold across local and global markets. The value of traders’ investments increases or decreases based on currency movements.Foreign exchange market conditions can change at any time in response to real-time events.The main attractions of short-term currency trading to private investors are:
24-hour trading, 5 days a week with nonstop access (24/7) to global Forex dealers.
An enormous liquid market, making it easy to trade most currencies.
Volatile markets offering profit opportunities.
Standard instruments for controlling risk exposure.
The ability to profit in rising as well as falling markets.
Leveraged trading with low margin requirements.
Many options for zero commission trading.
A brief history of the Forex market
The following is an overview into the historical evolution of the foreign exchange market and the roots of the international currency trading, from the days of the gold exchange, through the Bretton-Woods Agreement, to its current manifestation.
The Gold exchange period and the Bretton-Woods Agreement
The Bretton-Woods Agreement, established in 1944, fixed national currencies against the US dollar, and set the dollar at a rate of USD 35 per ounce of gold. In 1967, a Chicago bank refused to make a loan in pound sterling to a college professor by the name of Milton Friedman, because he had intended to use the funds to short the British currency. The bank’s refusal to grant the loan was due to the Bretton-Woods Agreement.
Bretton-Woods was aimed at establishing international monetary stability by preventing money from taking flight across countries, thus curbing speculation in foreign currencies. Between 1876 and World War I, the gold exchange standard had ruled over the international economic system. Under the goldstandard, currencies experienced an era of stability because they were supported by the price of gold.
However, the gold standard had a weakness in that it tended to create boom bust economies. As an economy strengthened, it would import a great deal,running down the gold reserves required to support its currency. As a result, the money supply would diminish, interest rates would escalate and economicactivity would slow to the point of recession. Ultimately, prices of commodities would hit rock bottom, thus appearing attractive to othernations, who would then sprint into a buying frenzy. In turn, this would inject the economy with gold until it increased its money supply, thus driving downinterest rates and restoring wealth. Such boom-bust patterns were common throughout the era of the gold standard, until World War I temporarilydiscontinued trade flows and the free movement of gold.