David White, the Managing Director of Axia FX, was one of the first ‘specialist currency’ traders in the UK. The ‘free’ foreign exchange market originally shaped in the early 1970’s gave rise to a number of ‘specialists’ within the industry and now, with a turnover of well over $166 billion, the industry is packed with knowing professionals and dedicated services to assist with your foreign exchange.
Axia FX provides a specialist international exchange service to private and corporate clients as an alternative to banks. As part of Axia’s service to customers, information is provided by industry professionals with the latest market intelligence.
Many of Axia’s private and business clients would like to know more about how the foreign exchange (‘forex’ or FX’) market came to be as substantial it is today. This article outlines a brief history, right up to current day practices within the industry.
The modern foreign exchange market was formed in the early 1970’s after thirty years under Government restrictions.
After World War II the market was controlled by a system referred to as the Bretton Woods system, so named because of its creation in New Hampshire, England. The Bretton Woods system controlled the rules for the ‘commercial and financial relations among the world’s major industries’ – Wikipedia.
Bretton Woods not only formed the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), now known as the World Bank Group, it also obliged member nations to adopt a ‘monetary policy’. This monetary policy maintained the exchange rate by tying its currency to the U.S. dollar. In turn, the U.S. dollar linked it’s convertibility back to gold.
However, on 15 August 1971 the United States ‘unilaterally terminated convertibility of the US$ to gold.’ This shock decision was down the President Nixon, there were a number of factors involved, but put simply the dollar was incredibly overvalued in relation to gold.
Following Americas decision to deviate from the Bretton Woods system, by March 1976, the rest of the world’s major currencies followed suit and were ‘floating currencies’ – thereby their monetary policy was no longer principally dictated by the exchange rates.
Thus, the modern foreign exchange market was formed; this is the most liquid financial market in the world, with assets being sold without significant movement in the price and minimum loss of value. Traders within the market include; ‘large banks, central banks, institutional investors, currency speculators, corporations, governments, other financial institutions, and retail investors.’ This is where Axia FX becomes involved in the foreign exchange market, helping clients trade their currency at a more competitive rate than traditional banks.
It was reported by Triennial Central Bank Survey in 2010 that the daily turner over of the ‘forex’ market was US$3.98 trillion. Also in 2010 the U.K. accounted for 36.7% of trading, making it one of the most important foreign exchange trading centres in the world.
The foreign exchange market is continuing to develop, with a trading increase of ‘20% between April 2007 and April 2010 and has more than double since.’ – Bank for Internal Settlements, Dec 2010. The growing increase of the foreign exchange market is down to various factors, such as; the increased frequency of trading, international retail and property investors and the introduction of electronic avenues in to the trading market. Electronic methods of transaction allow for quicker trading times and reduced costs, encouraging clients to partake in international trading and foreign currency exchange.
It is services such as AxiaFX that have contributed to the ease of trading internationally for its private and corporate clients. With such services, international retailers, and private clients alike, are able to trade one currency for another without too much market fluctuation, specialist market rates and increased transparency provided by industry professionals.
Author bio: this piece was produced by AxiaFX as an introduction to the history of Foreign Exchange.