The foreign exchange market is not new, as some of us tend to believe. In fact, one can trace the history of Forex to many centuries ago. Records from the Babylonian times show how different nations had different currencies and there was a constant need to exchange them. Babylonians were also among the very first to make use of paper notes and receipts for various transactions. Of course, these transactions were only for the purpose of paying for goods, services or wages and never for speculative purposes.
History tells us that while the first currency coins were brought in to use at the time of the illustrious Pharaohs, the Babylonians introduced paper notes as a form of currency. Roman coins of different denominations called aureus and denarius were very commonly used throughout the world and hence could be rightfully called the first foreign currency coins.
What happened after World War II?
The time after World War II was a period of great instability on the economic front for many countries. England and many other European countries were left in almost complete ruins with only the US economy being relatively strong and stable. It therefore followed that the US dollar also became the most prominent currency after the World War II. Accordingly it was decided that the US dollar would now be treated as the new global reserve currency. At the famous Breton-Woods conference held in July 1944, it was agreed that all other foreign currencies would now be fixed based on the US dollar. This led to the creation of a new international financial network.
Though the Breton-Woods system was initially designed to be a permanent system, the movement of national economies in different directions started putting increasing pressure on the system. The US economy itself was under great pressure and though many efforts were made to continue with the Breton Woods system with some realignment, the moves failed and the Breton-Woods system collapsed sometime in the early 1970s.
By 1973, the currencies of the major nations were not controlled by the government but by the unyielding forces of demand and supply. Foreign currencies floated more freely across various countries and exchange prices were floated almost daily. The volumes and speed of these transactions as also the volatility in the exchange rates kept increasing throughout the 1970s. This led to greater trade liberalization, more market deregulation and consequently to newer financial instruments.
In the last few decades, most countries have removed almost all restrictions that existed on capital flows. This has allowed the market forces to adjust the foreign exchange rates, as the market perceives their values.
The Internet boom in the 1990s also saw the introduction of the first online currency trading session. This had a significant impact on the development of the Euro as a prominent foreign currency and as a competent rival to the US currency. In 2002, the Euro became the official currency for the members of the European nation.
Trading foreign currency today
Tremendous advances both in terms of financial sophistication and technological innovations have been made in online foreign currency trading and are today considered an ideal investment option for individuals and large entities alike.