The History of Forigen Currency

It was at the time of the Pharaohs that money began to be used. In effect, the Babylonians were the first people who used notes and receipts. Foreign currency trade in the Middle East began when various peoples, each of whom had their own currency, began to trade with each other.In the middle ages, traders felt the need for a more convenient method of making payments – a fact which led to the adoption of notes for money. This development made the economies of peoples who chose to use notes flourish.The foreign currency market assumed its present form in the mid 1930's. London became the center of world trade and the British Pound Sterling became the basic currency. World War II turned the world economic balance on its head. The British economy collapsed, and at the same time, the USA, which emerged relatively unscathed from the war, became the leading player in the foreign currency market.

The Bretton Woods Agreement
As World War II drew to an end (1944), 730 representatives from 45 nations attended a conference in the town of Bretton, whose intention was to set a new world economic order. The overarching aim was to create a stable basis for the economic markets that had been damaged. At the time, an agreement was signed which officially made the dollar the global base currency. It was defined as linked to gold at a fixed rate of $35 per ounce of gold. In addition, the other currencies in the world were largely linked relative to the dollar.For the dollar, this was an important achievement since only 15 years earlier, in 1929, the United States had suffered an unprecedented economic collapse. And then at the end of the war – the dollar took center-stage.

International Monetary Fund (IMF)
Another important part of the Bretton Woods Agreement was the establishment of the International Monetary Fund, which was to provide economic support for developing nations that affect the balance of world trade. The fund supports weak economies by stabilizing them and by encouraging economic growth in the world.

The Smithsonian Agreement
The Bretton Wood Agreement ultimately failed to achieve its objective of rehabilitating and stabilizing the economy in Europe and in Japan. Following a decision made by US President Nixon in August 1971, representatives of the International Monetary Fund’s 10 senior countries met and signed the Smithsonian Agreement in December of that year. The agreement put an end to the policy of linking global currencies to the dollar and linking the dollar to gold. In effect, the agreement paved the way to a floating currencies policy, which is the dominant policy in the world until this very day. The Smithsonian agreement forms the basis for foreign currency trading as we know it, and it enables a high level of fluctuation in currency exchange rates, taking place in a completely free market.

The European Joint Float
In 1972, a decision was made to jointly float the European currencies (up to a fluctuation level of 2.25%) in order to avoid being dependent on the dollar. The countries which decided to float their currencies jointly were: Germany, France, Italy, Holland, Belgium and Luxemburg.

The Era of Free-Floating
The era of the free floating foreign currencies trade began in 1971 and currency exchange rates turned into floating ones, rates which vary in the wake of currency trading. The main effect of the market in the free-floating era is supply and demand. Other factors that determine exchange rates include: Gross National Product, unemployment levels, political events and interest rates.

The Foreign Currency Market
TodayNowadays the free floating policy, which is based upon supply and demand, is the dominant policy in global markets.All of the main currencies are traded freely opposite other currencies in accordance with relative changes in their values.Only very infrequently do the central banks try to influence trade levels. The free-floating method is ideal for trading in a virtual marketplace.