The Foreign Finance Exchange Market | Finance News Insurance ...

This article is an overview into the historical evolution of the foreign finance exchange market. It follows the historical roots of the international currency trading from the days of the gold exchange, through the Bretton Woods Agreement, to its current setting.

The Gold exchange period and the Bretton Woods Agreement.

The Bretton Woods Agreement, established in 1944, fixed national currencies against the dollar, and set the dollar at a rate of 35USD 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.

This agreement aimed at establishing international monetary steadiness by preventing money from taking flight across countries, and curbing speculation in the international currencies. Prior to Bretton Woods, the gold exchange standard ? dominant between 1876 and World War I ? ruled over the international economic system. Under the gold exchange, currencies experienced a new era of stability because they were supported by the price of gold.

However, the gold standard was a weakness of boom and bust. As an economy strengthened, it would import much until he went down its gold reserves required to support its currency. Therefore, decreases the money supply, interest rates soared and economic activity has diminished to the point of recession. Ultimately, the price of commodities would hit bottom, appearing attractive to other nations in a sprint buying frenzy that injected the economy with gold until it increased its money supply, driving down interest rates and restoring wealth into the economy. These cycles of boom and bust patterns abounded throughout the gold standard until World War I temporarily discontinued trade flows and free movement of gold.

Bretton Woods Agreement was founded after World War II to stabilize and regulate the international Forex market. Participating countries agreed to try to preserve the value of their currency within a narrow range against the dollar and an equivalent rate of gold as needed. The dollar got a job as a reference currency, reflecting a shift in global economic dominance from Europe to America. Countries were prohibited devalue their currencies to benefit their foreign trade and was only allowed to devalue their currencies by less than 10%. The volume of the Forex trade led to massive capital flows that were generated by post-war construction in the 1950s, and this movement destabilized the foreign exchange rates established at Bretton Woods agreement.

1971 marked the abandonment of Bretton Woods, the dollar no longer convertible into gold. In 1973, the forces of supply and demand controlled major industrialized nations currencies?, which now floated more freely across national borders. Prices were floated daily, with volumes, speed and price volatility all increasing throughout 1970, and new financial instruments, market deregulation and trade liberalization appear.

Onset of computers and technology in 1980 was driven by the country to expand the market continuum for cross-border movements of capital across time zones in Asia, Europe and America. foreign currency has risen sharply to almost 70 billion dollars a day in 1980, more than 1.5 trillion U.S. dollars a day two decades later.

Explosion on the europe market.

The rapid development of the Eurodollar market with dollars deposited in banks outside the U.S., was an important mechanism to accelerate the exchange of foreign trade. Likewise, Euro markets are those where assets are deposited outside the currency of origin. Eurodollar market first in 1950 when the Soviet Union, oil revenue ? all in dollars ? was deposited outside the concern of the United States to freeze the U.S. regulatory authorities. This has led to a mass pool of offshore dollars outside the control of U.S. authorities. U.S. government imposed laws to restrict dollar lending to foreigners. Euro markets were particularly interesting because they had far fewer regulations and offered higher yields. The end of the year 1980, U.S. companies began to borrow offshore to find the cheapest place in the Euro market to hold excess liquidity, short-term loans and financing imports and exports.

London was and remains the principal offshore market. In 1980 it became an important center of the Eurodollar market when British banks began lending dollars as an alternative to pounds in order to maintain its leading position in global finance. location in London (working in the Asian and American markets) is also a tool to maintain its leading position in the European market.

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