One of the important reasons that makes the foreign exchange market so interesting is the variety of events that drive the market. These events may be quite different in essence or in appearance, and the fields covered also extend from geopolitics, government news to social news, and macroeconomics. Throughout history, those profound events have dramatically changed the environment for foreign exchange trading. Let’s know what events have happened in history to form the current market!
Let’s know what events have happened in history to form the current market!
Bretton Woods Agreement
The first major shift in the foreign exchange market was the Bretton Woods Agreement after World War II. This is the result of discussions between the United States, the United Kingdom, and France at the United Nations Monetary and Financial Conference in Bretton Woods with the goal of designing a new global economic order. This location was chosen because the United States was the only country not affected by the war at the time, while most European countries were in ruins. This is undoubtedly a good thing for the United States: after the end of World War II, the dollar has benefited from being unaffected by the war, and it has transformed from the most unsuccessful currency after the US stock market crash in 1929 to the benchmark against which other international currencies are compared currency. As mentioned above, the Bretton Woods Agreement was established to create a stable economic environment and allow the global economy to recover itself. But at the same time, it also established the pegged rate/fixed exchange rate and the International Monetary Fund (IMF) to stabilize the global economic situation. Although the Bretton Woods agreement only lasted until 1971, it honorably accomplished its mission of stabilizing the economic recovery of Europe and Japan.
The beginning of the floating exchange rate system
After the disintegration of the Bretton Woods system, the 10 Western countries reached a new Smithsonian Agreement in December 1971. Also as an agreement on the international monetary system, the Smithsonian Agreement allows for greater currency volatility than the Bretton Woods Agreement. At the same time, in 1972, when the major European countries jointly tried to get rid of their dependence from the dollar, West Germany, France, Italy, the Netherlands, Belgium, and Luxembourg jointly established the European Joint Floating Agreement. While both pacts made mistakes which are similar to the Bretton Woods agreement and were eventually terminated in 1973, they both played a key role in the move to a floating exchange rate regime.
Not long after these pacts were in place, investors quickly realized the profit potential of this new foreign exchange market – even though the currency was often subject to government intervention, there was still a strong range of volatility, while where there was volatility there was profit. This has become more and more obvious in the more than ten years after the end of the Bretton Woods Agreement: the rapid development of the US economy has led to a rapid and excessive appreciation of the dollar, which has directly led to the inability of many developing countries and US factories to repay their debts then were forced to close down.
The establishment of the euro
After World War II, Europe concluded a number of treaties aimed at bringing the countries of the region closer together. The most influential of these is the European Union Treaty, or the Maastricht Treaty. As its name implies, the treaty established the European Union (EU) and the euro currency, and set out goals and steps for the European Community to establish a political and economic union. Although the treaty has been revised several times, the creation of the euro in this treaty provides European banks and businesses with a range of benefits including eliminating exchange rate risk in a globalized economy.
In the 1990s, the currency market grew rapidly and became more complex due to technological developments. Quotes that used to require a phone call through an army of traders and brokers can now be obtained at the click of a mouse at home. These advances in communication benefit from the explosion of capitalism and globalization after the fall of the Berlin Wall and the collapse of the Soviet Union. Benefiting from this, foreign exchange trading has also undergone a sea change: currencies that were previously locked in the cage of the totalitarian political system can now be traded. In addition, some emerging markets led by Southeast Asia have attracted more capital and currency speculation.
The foreign exchange market has been a freely tradable market since 1944. The most typical example – the unique competitiveness of each country’s currency creates a very liquid free market. There are more and more providers of online trading, competition has become more intense, and the spreads between buying and selling currencies have narrowed. Some traders who do a lot of trades now even have access to the same electronic communication networks as international banks and brokers.
See more: The 5 Most Popular Trading Currencies In The World
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