Historical events in the foreign exchange market

  • May 16 2022
  • by
  • Analyst AZA
Historical events in the foreign exchange market

Historical events in the foreign exchange market

Forex trading is a career and deserves to be recognized as a mainstream profession. As a trader, I realized that trading requires a hardworking and disciplined person. Therefore, we, as traders, must constantly learn so that we remain competent in the ever-changing environment of the financial markets. In order for a person to know where he is going, he needs to know where he came from, so I have devoted an article to informing traders about the history of the forex markets. History is very important to our prosperity as traders because knowing and understanding history will reduce the chance of repeating the mistakes of the past. In 1994, forty-four countries met at Bretton Woods to discuss the future of international economic governance after World War II. There was mutual agreement that economic instability is the root cause of conflicts that arise between countries.

After the meeting, an agreement was reached and the countries agreed to set up global bodies that would be responsible for maintaining fair trade and the well-being of the international economic outlook. The ability to convert gold into US dollars at a set rate and fix exchange rates between countries. Of all the agreements that have been finalized, the first is the only one that is still in use today. This meeting was of decisive importance for the development of the international economy, since it gave rise to the IMF, the World Bank, and other systemically important institutions. These institutions offer assistance to countries that are still developing. Twenty-seven years after the Bretton Woods Agreement, it was replaced by a new policy that became the Smithsonian Agreement. The new policy was led by the President of the United States.

The new agreement ruled out the possibility of converting Gold to dollars, but retained the fixing of rates between currencies. This was unfavorable for the US as it experienced a trade deficit and a global need for a weaker dollar. Therefore, the Smithsonian agreement did not last long. After the Bretton Woods era, free market capitalism was introduced, with the value of a currency determined by the theory of supply and demand. This opened the window for new currency crises and an increase in the rate of price fluctuations. The controversy that arose in the adoption of the new system was that the free market would not be able to accurately determine the real value of the currency. When George Soros placed a ten billion dollar trade against the currency of the United Kingdom and made a profit, he was nicknamed "the man who broke the British currency." This was one of the major events in the history of currency trading.

In 1979, France and Germany worked together to create a European monetary system that kept exchange rates stable, controlled inflationary pressures, and met other monetary obligations. The European Monetary System has launched a component that will tie the currencies of European countries to a set of other currencies at a fixed price and a fixed rate. It was expected that the pound would join the mechanism later in a certain range of ranges. The system proved successful for some time as it reduced the inflationary pressures that were being experienced at the time. Confidence in the system was lost when investors began to believe that the valuation of currencies was inaccurate. As a result of the rate hike by the German central bank, other European countries were forced to raise rates in order to reach parity. England had high unemployment and a weaker economy.

George Soros realized that England was unlikely to raise its stakes and bet against the pound. In the late nineties, Asia experienced a financial crisis. Before the crisis, Asian markets attracted the attention of international investors. Asian markets experienced strong gains and growth was supported by fixed exchange rates against the US dollar, which gave investors a sense of stability. As a result, their currencies strengthened due to the increase in speculative positions, which were backed by underlying fundamentals. In 1997, the current accounts of most countries started to show deficits, and this was not good for the economy, everything deteriorated, the stock markets plummeted, business lending was negatively affected.

As many institutions failed to adapt, the Japanese monetary authorities decided to raise their interest rate to protect their currency from depreciation, but the plan was not implemented due to Thailand's announcement of a managed float of the Thai baht. This resulted in their currencies experiencing strong selling pressure, indicating instability. In 1999, European countries introduced the Eurocurrency, which would be accepted as legal tender for European countries. Although some countries have chosen to keep their individual currency. At first it was used electronically, and three years later physical banknotes and coins were introduced. This meant that a common monetary policy would be required, which would be managed by the ECB. In order for a country to be considered for adopting the euro as their currency, they had to meet certain conditions.

For example, the national budget deficit must be below a certain percentage of gross domestic product, and inflation in the country must be less than or equal to 150 basis points. Joining the euro can be beneficial as a country's poor capital flows can be masked by the good performance of other countries in the group. Accession to the euro may impose some restrictions on the acceding party. For example, the introduction of the euro deprives any independence in the implementation of monetary policy. Since eurozone countries do not have a perfect correlation, some of the bank's actions could be favorable for their economic conditions. Therefore, they try to counteract this issue with the help of fiscal policy, which in most cases is ineffective in the short term.

The new agreement ruled out the possibility of converting Gold to dollars, but retained the fixing of rates between currencies.


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