By Darren Bardsley BRIEF HISTORY
In the first three weeks of July 1944, delegates from 44 nations gathered at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire. The delegates met to discuss the postwar recovery of Europe as well as a number of monetary issues, such as unstable exchange rates and protectionist trade policies.
During the 1930s, many of the world's major economies had unstable currency exchange rates. As well, many nations used restrictive trade policies. In the early 1940s, the United States and Great Britain developed proposals for the creation of new international financial institutions that would stabilize exchange rates and boost international trade. There was also a recognized need to organize a recovery of Europe in the hopes of avoiding the problems that arose after the First World War.
The delegates at Bretton Woods reached an agreement known as the Bretton Woods Agreement to establish a postwar international monetary system of convertible currencies, fixed exchange rates and free trade. To facilitate these objectives, the agreement created two international institutions: the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (the World Bank). The intention was to provide economic aid for reconstruction of postwar Europe. An initial loan of $250 million to France in 1947 was the World Bank's first act.
The Bretton Woods Agreement was also aimed at preventing currency competition and promoting monetary co-operation among nations. Under the Bretton Woods system, the IMF member countries agreed to a system of exchange rates that could be adjusted within defined parities with the U.S. dollar or, with the agreement of the IMF, changed to correct a fundamental disequilibrium in the balance of payments. It was agreed that the 44 nations currencies would, from 1944 onwards be pegged or fixed against the US dollar. This agreement became known as the Bretton Woods Agreement and would remain intact for the next 27 years until 1971.
Advocates of the Bretton Woods system believed that stable exchange rates would avoid the "beggar thy neighbour" policies of the 1930s and benefit economies around the world by expanding international trade. However, over time, exchange rates became uncompetitive because of the infrequent changes in parities. In addition, there were often large destabilizing flows of currency, as speculators bet on the value at which the fixed exchange rate would be refixed. There were also concerns that a fixed exchange rate system did not allow countries enough freedom to pursue their own monetary and fiscal policies.
In 1971 the Bretton Woods agreement was disbanded and currencies were no longer pegged against the dollar and were allowed to float freely. Over the last 37 years not only have these currencies floated freely, but we have seen great advances in technology and the way in which these currencies are traded.
In 1987 when the ERM (exchange rate mechanism) was created it gave national currencies and in particular European currencies an upper and lower limit on either side of a central rate within which they could fluctuate. However this, as with the Bretton Woods Agreement no longer exists.
In 1992 something significant happened in this market and the currency speculators set about trying to break the ERM, which ultimately they succeeded in doing. This resulted in a number of currencies not being able to stay within the agreed limits, resulting in them leaving the ERM, the most memorable of these events was on 16 September 1992 and became known as Black Wednesday.
Black Wednesday occurred when the UK Conservative government was forced to withdraw the pound from the European Exchange Rae Mechanism , due to pressure by currency speculators and most notably George Soros, who made $1bn from forcing the pound out of the ERM on one trading day. For him this was a really good day's trading as he made $1bn in one single day.
When the Labour government took over five years later, the UK Treasury estimated that the cost of Black Wednesday was more like ฃ3.4bn. When the story was leaked to the press on 16 and 17 September 1992 that the cost of Black Wednesday was $1bn, it was later calculated in 1997 that it cost the UK tax payer ฃ3.4bn through a speculative trade, which resulted I the UK pound being forced out of the ERM.
In 1999 we enter the era of the Euro, which came into being in January of that year. As of January 2008 there are 20 countries using the Euro:
Andorra, Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Monaco, Montenegro, Netherlands, Portugal, San Marino, Slovenia, Spain and Vatican City.
CURRENT DAY
The Foreign Exchange market, Forex for short , is about exchanging and changing one currency for another. So as an example, you could trade the British Pound (GBP) for the US Dollar (USD) or you could trade the US dollar against the Euro
Not only are the Forex markets accessible by the banks and institutions, but the best news is that this market is now available to you and I, the private investor or day trader.
The Forex market s also the market that sets the tourist currency rates we all use when we go abroad on holiday or when we buy goods from abroad. So for example when you see gods advertised on eBay or elsewhere on the internet, or if you do business abroad, the exchange rate that you deal in or trade in is actually set by the Forex market.
So where is the Forex market located you might ask? Well actually there Forex market has no centrally location or designated exchange. It is unlike London or New York, where you get the London and New York Stock Exchanges, where you get traders that congregate and create a market.
The Forex is a global market, which is one of the significant benefits and means as it has no central trading location its able to be open 24 hours a day. The reason for this is that the Forex is traded through the global network of banks, corporations and individuals trading one currency against another.
This is why it has so much appeal to a lot of traders, because no matter where you are located in the world, the market is trading and there is no central exchange. Price fluctuations and changes in price occur even during the night when we are tucked up in bed and asleep. These changes are transmitted around the world for all the traders to see and access through their computer screen.
So what are the trading hours of the Forex market? As previously mentioned the market is open 24 hours a day and starts trading on Sunday evening at 5pm Eastern Standard Time (EST) in New York. This is the start of the trading week, which will trade though then 24 hours a day until Friday when it closes at 4pm EST. Then it all starts again on Sunday at 5pm EST.
A term commonly used when trading the Forex is the word "Liquidity". The volumes of currencies that are traded in the Forex on a daily basis are absolutely enormous and because of this huge amount of volume it creates a vast amount of "liquidity" in the market. What this means for you and I, the potential trader is that there is always massive opportunity to trade. If you want to be able to trade in a market that you can easily get in and out of, there simply is no bigger market that the Forex for liquidity.
The trading volumes within the Forex market have continued to rise year on year. The daily turnover in the Forex market in 1992 was around $500bn, which is an awful lot of money. In 2007 the Bank for International Settlements reported that the Foreign Exchange Market traded a whopping $3.2trn per day! and this figure is expected to increase in 2010 when the survey will be completed again.
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