The Modern History of the Currency Markets

The modern history of the forex market traces back to the late 1960’s when the U.S. determined it would end the link between the U.S. dollar and gold prices.  This marked the end of the Bretton Woods Agreement, and is considered the beginning of modern foreign money trading, as the U.S. dollar now floated freely on the world currency market.

Bretton Woods Agreement

The Bretton Woods Agreement is the landmark foreign currency agreement established in 1944.  The agreement fixed currencies against the price of gold, and determined that the U.S. dollar would be the reserve currency against other currencies of the world.

The Bretton Woods agreement began to unwind in 1968, and over a 5-year period continue to dissolve as currency trading around the world hampered trade as the dollar was considered overvalued relative to its counterparts. In August of 1971, the President of the United States, Richard Nixon, suspended the dollar as foreign money that could be converted into gold.

The British pound, the U.S. dollar along with many other currencies from industrialized and developed countries have been trading for hundreds of years in some form.  Trade between these nations by default created a market.

Today’s Exchange Market Environment

Today the currency market is one of the largest and most liquid capital markets around the globe with volume of more than 5 trillion dollars a day of notional value.  Although the currency markets first appeared as a way to facilitate the trade of goods and services it is now considered by many as its own asset class. Foreign currency trading is employed by many as a macro strategy where traders evaluate global economic conditions to determine the future direction of a currency pair.

The modern history of the exchange markets began with the unwinding of the Bretton Woods agreement, where the U.S. dollar was decoupled from gold prices.  Today, the foreign exchange market is the largest and most liquid capital markets, providing the facilitation of goods and services as well as trading opportunities around the globe.  Traders and consumers can easily trade currency pairs such as the USD/JPY, the EUR/USD and the AUD/USD 24-hours a day, 6-days a week.