Today’s foreign exchange (Forex) market traces its origins to problems with currency exchange that developed in the post-World War II years. Following WWII, under an international treaty known as the Bretton Woods Agreement, most world currencies adopted a fixed exchange rate measured in terms of the U.S. dollar, which in turn was pegged to the gold standard. The idea was to stabilize currency values and stimulate trade. Over the next 25 years, it became clear that this rigid system was doing more to impede international trade than to promote it.
In 1971, the Bretton Woods Agreement was abandoned. Currency exchange rates were allowed to “float” and find their own level, varying in response to market forces.
Due to sustained U.S. trade deficits, foreign banks accumulated large amounts of dollars by the 1980s. These Eurodollars helped generate a $70 billion/day volume in currency exchange in the 1980s.
The creation of the Internet in the mid-1990s made it possible to trade currency anywhere 24 hours a day. With electronic funds transfer, no physical exchange of currency was needed.
The speed and efficiency of electronic currency exchange made it ideal for speculators seeking profit from changes in exchange rates. These Forex traders now generate 80 percent of market activity.
By 2004, Forex had developed into a $1.9 trillion a day securities market. As of 2007, the daily volume passed $3 trillion each business day.