Sunday, March 29, 2015

History of the Forex Market

Until the 1970s or so, currency trading was limited mostly to the needs of large companies conducting business in multiple countries.
Trading for investment and speculative purposes was not widely practised at this time, and most trading was centered on commodities and individual stocks.

Speculation – An attempt to profit on the fluctuation in prices for currencies and other investment securities.
 The Bretton Woods Accord – Courting Controversy
After World War II, economies in Europe were left in tatters.
To help these economies recover – and to avoid mistakes made in the wake of the First World War – the Bretton Woods Accord was convened in July 1944.
Several resolutions arose from Bretton Woods, but it was the "pegging" of foreign currencies to the U.S. dollar that arguably had the greatest immediate impact on the global economy.

Gold Standard Currency – A commitment to fix the value of a currency to a specific quantity of gold. Under this system, the holder of the country's currency can convert funds to an equal amount of gold.

Fiat or Floating Currency – Fiat currency is the opposite of a gold standard arrangement. In a fiat currency system, the currency's value rises and falls on the market in response to demand and supply pressures. It is this fluctuation that makes it possible to speculate on future currency values.
 Pegging U.S. Currencies to the U.S. Dollar
By pegging (or linking) these currencies directly to the dollar, the value of the pegged currencies remained dependent on the value of the dollar.
At the same time, the value of the dollar was tied to the price of gold which, at the time of the Bretton Woods Accord, was valued at $35 an ounce.
The U.S government was obligated to maintain gold reserves equal to the amount of currency in circulation, making the United States a true gold standard economy.

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