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What is Forex

A to Z of the Forex chronicle. Set off on a Forex history journey.

The Forex Currency Market (Forex, sometimes FX, from English FOReign EXchange) is an international (inter-bank) financial market for exchanging currencies. Being global (international), this market operates round the clock (Monday to Friday), which distinguishes it from individual (national) stock exchanges, where trades can only occur during the working day. In addition, the Forex market is a leader among financial markets in terms of total daily trade volume. Currently, the daily turnover is more than USD 4 trillion, and by 2020 it is projected to rise up to USD 10 trillion.

Such an enormous volume (the daily volume of the Forex market exceeds US annual budget twofold and the annual budget of the United Kingdom fourfold) is a guarantee of the highest market liquidity. Liquidity means the ability to freely exchange almost any volume of one currency for another.

A significant number of professional participants (banks, trusts, foundations, multinational corporations, brokerage companies) work on the Forex market. Brokerage companies, as intermediaries between the currency market and individual (private) traders, allow investors with different financial capacities to carry out transactions on the Forex market and earn significant funds through leverage.

Not attempting to thoroughly study the history of financial markets, in this brief course we will still denote some of the most significant milestones of the currency market development.

The currency market’s long history dates back to the Ancient East. In the Middle Ages, with the advent of international banks, there was a need for introduction of payment means valid upon presentation to third parties. During this period, an increase in the number of deals and their diversity and flexibility can be noted.

The currency market had acquired a more or less modern form by the end of the XIX century. In 1867, in Paris, it was registered as a legal structure. Currency fluctuations at that time were almost absent, since currencies were pegged to gold. This period is called the “era of the gold standard”.

The next milestone was the year 1944, when an agreement was signed in Bretton Woods (USA) (Bretton Woods Agreement), according to which all world currencies became pegged to the dollar, and only the latter became pegged to gold. The International Monetary Fund (IMF) was formed. Rate fluctuations were regulated to within 1%.

In 1971, the United States abandoned the free convertibility of the dollar into gold, and as a result of the agreement reached in Washington (Smithsonian Agreement), fluctuations of up to 4.5% against the dollar and 9% for non-dollar pairs became possible. In fact, it marked the end of the Bretton Woods system.

In 1976, the IMF offered to legally implement the established at the time relationship between the participants of the currency market in the form of a new agreement, which had been signed in Kingston (Jamaica) by the leaders of 20 most economically developed countries, except for the countries of the Communist bloc. The result of the Jamaican agreement was that the American dollar became the world reserve currency with the function of a universal payment means and evaluation of other currencies. This agreement also officially allowed exchange rates to fluctuate freely, although some countries had been ignoring the restrictions on currency fluctuations established in 1971 all the same.

Perhaps, this point may be regarded as the moment of the birth of the modern Forex market.

The development of telecommunication technologies has moved trading out of exchange buildings to replace them with a telephone dealing and then with e-dealing systems. Nowadays, trades are normally conducted on the Internet.