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Among the many things that make Forex so interesting are the underlying themes that drive the market itself. When looking at it from a fundamental viewpoint, there are geopolitics, governments, societies, macroeconomics, and the behavior of numerous participants who vary greatly in objectives and approach. Throughout history, we have seen major events born from these themes that have greatly influenced the Forex trading environment. Here are some highlights from five impactful events.

The Bretton Woods Accord

The first major transformation, the Bretton Woods Accord, occurred toward the end of World War II. The United States, Great Britain, and France met at the United Nations Monetary and Financial Conference in Bretton Woods, NH to design a new global economic order. The location was chosen because at the time, the U.S. was the only country unscathed by war. Most of the major European countries were in shambles. In fact, WWII vaulted the U.S. dollar from a failed currency after the stock market crash of 1929 to benchmark currency by which most other international currencies were compared. The Bretton Woods Accord was established to create a stable environment by which global economies could restore themselves. It also established the pegging of currencies and the International Monetary Fund (IMF) in hopes of stabilizing the global economic situation.Though the Bretton Woods Accord lasted until 1971, it ultimately failed but did accomplish what its charter set out to do – to re-establish economic stability in Europe and Japan.

The Beginning of the Free-floating System

After the Bretton Woods Accord came the Smithsonian Agreement in December of 1971, which was similar but allowed for a greater fluctuation band for the currencies. In 1972, the European community tried to move away from its dependency on the dollar. The European Joint Float was then established by West Germany, France, Italy, the Netherlands, Belgium, and Luxemburg. Both agreements made mistakes similar to the Bretton Woods Accord and in 1973 collapsed. These failures resulted in an official switch to the free-floating system.

The Plaza Accord

It did not take long for traders to realize the potential for profit in this new world of currency trading. Even with government intervention, there still were strong degrees of fluctuation and where there is fluctuation, there is profit. This became clear a little over a decade after the collapse of Bretton Woods. The U.S. economy was booming but the dollar had risen too far, too fast. The weight of the U.S. dollar was crushing third-world nations under debt and closing American factories because they could not compete with foreign competitors. In 1985, the G-5, the most powerful economies in the world – U.S., Great Britain, France, West Germany, and Japan – sent representatives to what was supposed to be a secret meeting at the Plaza Hotel in New York City. News of the meeting leaked, forcing the G-5 to make a statement encouraging the appreciation of non-dollar currencies. This became known as the “Plaza Accord” and its reverberations caused a precipitous fall in the dollar.

Establishment of the Euro

After WWII, Europe forged many treaties designed to bring countries of the region closer together. None were more prolific than the 1992 treaty referred to as the Maastricht Treaty, named for the Dutch city where the conference was held. The treaty established the European Union (EU), the creation of the Euro currency, and put together a cohesive whole that included initiatives on foreign policy and security. The treaty has been amended several times but the formation of the Euro gave European banks and businesses the distinct benefit of removing exchange risk in an ever-globalized economy.

Internet Trading

In the 1990s, the currency markets grew more sophisticated and faster than ever because money – and how people viewed and used it – was changing. A person sitting alone at home could find, with the click of a button, an accurate price that only a few years prior would have required an army of traders, brokers, and telephones. These advances in communication came during a time when former divisions gave way to capitalism and globalization (the fall of the Berlin Wall and the Soviet Union). For Forex, everything changed. Currencies that were previously shut off in totalitarian political systems could be traded. Emerging markets, such as those in Southeast Asia, flourished, attracting capital and currency speculation.

The history of Forex markets since 1944 presents a classic example of a free market in action. Competitive forces have created a marketplace with unparalleled liquidity. Spreads have fallen dramatically with increased online competition among trustworthy participants. Individuals trading large amounts now have access to the same electronic communications networks used by international banks and merchants.

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--- Written by the DailyFX Research Team