History of the Forex market
Prior to 1971, speculation was not permitted in the currency markets due to an agreement called the Bretton Woods Agreement. This agreement was set up in 1945 with the purpose of stabilizing international currencies and preventing money from fleeing across nations. This agreement fixed all national currencies against the dollar and set the dollar at a rate of $35 per ounce of gold.
In 1971, the Bretton Woods agreement was finally abandoned and the US dollar was no longer convertible to gold. By 1973, currencies of the major industrialized nations were floating more freely, helped by the forces of supply and demand. Prices were set, with volumes, speed and price volatility, all increased during the 1970s. This paved the way to new financial instruments, market deregulation and open trade. It also led to a rise in the power of speculators.
Accelerated by the arrival of computers during the 1980s, the movement of money across borders became a continuum, trading through the Asian, European and American time zones. The big banks created dealing rooms where hundreds of millions of Dollars, Euros, Pounds, and Yen were exchanged within minutes.
London has developed to become the world’s leading international financial center and is the world’s largest Forex market. In the 1980s, it became the key center in the Eurodollar market when British banks began lending dollars as an alternative to pounds in order to maintain their leading position in global finance. London’s convenient geographical location (operating during Asian and American markets) is also instrumental in preserving its dominance in the Euro market.