Foreign Exchange

In: Business and Management

Submitted By AirRayne23
Words 727
Pages 3
Foreign Exchange
The foreign exchange market facilitates the exchange of one currency for another. It is make up of banks, commercial companies, investment management firms, forex brokers, and investors. It is considered to be the largest financial market in the world. This paper will discuss everything from how the foreign exchange market began to the current market.
History of Foreign Exchange
The foreign exchange market has evolved over the years. From 1876 to 1913, the gold standard was used; meaning countries used gold to back its currency. Each currency was able to be converted to gold at a specified rate. This means that the exchange rate between currencies was determined by how much gold each was worth.
The gold standard was suspended in 1914, when World War I began. Some countries temporarily reverted to the gold standard after the war, but abandoned it when the financial crisis of the 1920s hit. Throughout the 1930s the foreign exchange market was considered very unstable, and during this time the volume of foreign trade declined significantly.
The next step in the history of foreign exchange would be to agree on fixed exchange rates. This was declared in the Bretton Woods Agreement. The agreement called for governments to set exchange rates between currencies. They were also required to prevent exchange rates from deviating more than 1 percent from the original established rate. This agreement lasted from 1944 to 1971.
In 1971, the Smithsonian Agreement changed the foreign exchange game once again. It was found that the dollar was overvalued, and this agreement called for the devaluation of it. In the agreement, the dollar was devalued to different degrees depending on which currency it was up against. In addition to devaluing the dollar, the Smithsonian Agreement also allowed for greater fluctuation of exchange rates. Before, only 1 percent was…...

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