A History of Currency Exchange: Forex Emerges from the Ashes

by: Hollie Wilcox
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Word Count: 305

If you intend to deal in Forex, it is probably helpful to know something about its origins. In this series of articles we are tracing the emergence of Forex from previous systems designed to regulate the exchange of foreign currencies.

Following the Second World War the Bretton Woods Agreement established the US dollar as the currency to which all others were pegged. In turn the dollar was pegged to gold. Faced with a declining economy, this agreement was abandoned in 1971 in a move by President Nixon that came to be known as the Nixon Shock. Rather than an unregulated system, a modified set of regulations known as the Smithsonian Agreement was put in place. This operated in a similar manner to the Bretton Woods Agreement but with modified values.

The hastily constructed Smithsonian Agreement failed to convince the international community that international currency exchange had been stabilised. This dam failed to prevent the outflow of assets from the US as pressure on both gold and the dollar persisted. The open market price of gold soared and countries pulled out of Bretton Woods. It finally collapsed in 1973 to be replaced by a floating currency system.

Suddenly currencies are allowed to float, their exchange rates being determined by market conditions. This is perceived to have many advantages over the fixed exchange rate systems this new regime replaced. Governments have far more autonomy in setting their fiscal and monetary policies.

One effect of floating exchange rates has both advantages and disadvantages. This is the fact that a floating currency can demonstrate considerable price volatilities. Understanding the underlying causes of currency value fluctuations and having the ability to predict accurately when they will happen, provides great opportunities for forex traders to make healthy profits.

Article Source: http://www.ArticleStreet.com/profile/hollie-wilcox-14216.html

About the Author

For more information on forex trading, visit the experts at www.worldforextrader.com now.

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