Currency trading has a long history and can return to the ancient Middle East and Middle Ages when foreign exchange started to be detected to take shape after the international merchant bankers devised bills, which are transferable to third party payments that allowed flexibility and growth in foreign exchange contacts.
The modern foreign exchange market characterized by periods of high volatility (which is a frequency and amplitude of a price alteration) and relative stability formed itself in the twentieth century. In the middle of 1930 the British capital London became a major center for foreign currency and the British pound served as the currency for trade and to keep as a reserve currency. Since the old times foreign exchange was traded on the telex machines, or cable, the pound has generally the nickname “cable”.
After the Second World War, where the British economy was destroyed and the United States was the only country unscarred by war, U.S. dollars, in line with the Breton Woods agreement between the United States, Britain and France (1944), the reserve currency for all capitalist countries and all currencies were pegged to the U.S. dollar (through the constitution of currencies ranges maintained by central banks of those countries through the interventions or currency purchases). In turn, the dollar was linked to gold at $ 35 per ounce. So the dollar became the world reserve currency. In accordance with the same agreement was organized the International Monetary Fund (IMF) and now a major financial support to developing countries and former socialist countries make economic transformation.
To implement these goals the IMF uses instruments as Reserve trenches, which allow a member of his own reserve asset quota at the time of payment, Credit trenches drawings and stand-by arrangements. The letters are the standard form of IMF loans unlike that of the compensatory financing facility extends financial assistance to countries with temporary problems related to reduction of export revenues, the buffer stock financing facility, which is aimed at assisting the stocking up of primary commodities in order to ensure price stability in a particular commodity and the extended facility designed to help members with financial problems in amounts or over longer periods than the scope of the other facilities.
At the end of the 70-s of the free-floating currency was officially mandate was the most important milestone in the history of financial markets in the XX century lead to the formation of Forex in the contemporary understanding. That is the currency can be traded by anyone and its value is a function of the current supply and demand forces in the market, and no specific intervention points that should be respected. Foreign exchange has experienced spectacular growth in volume since currencies were allowed to float freely against each other. While the daily turnover in 1977 was U.S. $ 5 billion, increased to U.S. $ 600 billion in 1987, the U.S. reached 1 trillion U.S. dollars mark in September 1992, and stabilized at around 1.5 trillion U.S. dollars in 2000.
Key factors affect these spectacular growths in volume are listed below. An important role belonged to the increased volatility of exchange rates, growing mutual influence of different economies on bank rates set by central banks, currency exchange rates which substantially affect more intense competition on the goods, and at the same time, merging of companies from different countries, technological revolution in the sphere of foreign exchange. The latter exposed in the development of automated systems and their transition to the currency trading through the Internet. In addition to the treatment systems, systems that meet simultaneously connect all traders around the world, electronically duplicating the brokers market.
Advances in technology, software and telecommunications and increased experience have increased the level of sophistication of traders, their ability to both generate profits and properly handle the exchange risks. Therefore trade in the direction of refinement led the volume.
The roots of trading of currencies can be traced back to the Middle Ages. It was developed by the development of bills of exchange by international merchant bankers. These bills of exchange represented transferable third-party payments, which facilitated both flexibility and growth in the trades that included foreign exchange.
The forex as we know it today with its volatility and relative stability began to be shaped in the 20th century. At that time London was a leading foreign exchange center. As a result the British pound turned into the major currency for executing trades. Additionally, it was the main currency in which bank reserves were held. The use of telex machines or cable for the execution of currency trades during those times gave the pound the nickname cable. However, the World War II left Britain economically devastated. This led to the emergence of the USA as a financial center, since its economy was not greatly influenced by the negative impacts of the war.
Combined with the Breton Woods Agreement of 1944 between the USA, Great Britain and France, the US dollar was turned into the reserve currency for the capitalist countries. As a result all other currencies were linked to the American dollar. The currency rates were allowed to be adjusted by the central banks of the corresponding country by using such means as interventions or the purchase of currencies. On the other hand the gold was used as a base measure for the value of the US dollar, meaning that it was linked to it. As a result, the US dollar was turned into the reserve currency of the world economy.
The International Monetary Fund (IMF) was established under the same agreement. Its major activities surrounded the financial support of the former socialist countries and the developing countries that were undergoing a transformation of their economic activities after the war. In order to achieve its goals the IMF applied the following activities:
The main factor that contributed to the development of the foreign exchange market as we know it today is the free-floating of currencies that was established at the end of the seventies. The free-floating of currencies represents the ability of everyone to be involved in the trading of currencies, while their prices are determined by the levels of supply and demand. Additionally, this principle includes the aspect of no particular intervention point occurrence. As a result of the free-floating of currencies, the volume growth has significantly increased.
The major factors that contributed to the increase in the volume of currencies trade include: