History Of Foreign Exchange Market

A system of changing one currency into another has existed since the days of the Roman empire. Today, however, the forex market is the biggest financial trading market in the world – with over $1.5 trillion's worth of deals done every day!

Prior to World War 2, the forex market was stable and had changed little: the system used by the Romans was still, basically, the way most traders traded. In fact, during this period, very few financiers looked to make any money out of the forex market - which might have had something to do with the fact that governments and society usually looked unfavourably on those who currency speculated.

However, the period between 1944 and 1973 saw a huge change – both in the way that financiers viewed trading in forex and the way the forex market itself worked.

Initially this change was due to Nazi Germany's (almost successful) attempts to undermine (by means of printing millions of fake notes) the value of the [British] Pound, which (at that time) was seen as the standard-bearer by which all other currencies were valued.

As a result, following WW2 new measures were needed to control currency speculation and reintroduce a stable forex market. These measures came together in the Bretton Woods accord, which established a system of “pegged” currencies. Basically, what this meant was that all major currencies of the world were pegged against the dollar, which itself was pegged against the value of gold.

However, in 1973, largely due to the emerging European Union, the Bretton Woods accord fell apart and currencies started to trade under a system known today as a “free float”. Unlike the pegged system, a free float let's a currency's value float against those of other currencies, depending on its strength.

Because a free float system trades more closely to the “real” value of a currency, the change to a free float system has allowed traders to trade in the market freely, with a country's central bank only becoming involved once they felt their currency was under attack – as was the case in Britain in the late 1980s and Asia in the late 1990s.