The Evolution of Forex

<WikiFX Malaysia Original – Editor: Fion>

At the end of World War II, the British economy went into decline, while the United States was the only developed country that survived the war unscathed. Hence, the U.S. dollar naturally became the reserve currency for most countries. At that time, the U.S. dollar was pegged to gold at $35 per ounce; thus the USD became the worlds reserve currency.

As the entire world was experiencing such chaos that major Western governments saw the need to create a system that would stabilize the global economy. This agreement, known as the “Bretton Woods System,” required a currency peg to the U.S. dollar which in turn set the exchange rate for all currencies against gold. According to the agreement, the exchange rate of national currencies against the U.S. dollar can only fluctuate within the range of 1% above and below the legal rate.

This exchange rate was in place for some time, but as the world's major economies transitioned and developed at different rates, the rules of the system soon became outdated and restrictive.

By 1971, President Nixon had abrogated the Bretton Woods agreement. In 1973, the exchange rate constraints between countries, bank transactions, and restricted foreign exchange transactions era ended, the currency market evolved into a free-floating money market where exchange rates were determined by supply and demand – this created a new system of currency valuation that is in alignment with Adam Smiths economic theory whereby markets operate the most optimally in the absence of any government interventions.

In the 1990s, thanks to computer junkies and the burgeoning Internet, banks began to set up their own trading platforms. The purpose of these platforms was to provide real-time quotes to customers so they could execute trades immediately. At the same time, a number of savvy commercial marketing organizations launched Internet-based trading platforms for individual traders. These entities are called “retail forex brokers” which makes it easy for individuals to trade by allowing smaller trade sizes. Unlike the interbank market, where the standard trade size is 1 million units, retail brokers allow individuals to trade as few as 1,000 units.

Since currencies have been allowed to float freely against each other, there has been a dramatic increase in the volume of foreign exchange transactions. Foreign exchange turnover reached $5 billion in 1977, grew to $600 billion in 1987; surpassed the $1 trillion mark in September 1992, and stabilized at about $5 trillion around 2010.

<WikiFX Malaysia Original – Editor: Fion>