History of Foreign Exchange
The history of foreign exchange can be traced back to ancient times, when traders exchanged goods and services across borders. However, the modern foreign exchange market as we know it today emerged in the 1970s with the end of the Bretton Woods Agreement.
Before 1971, the value of most currencies was fixed to the price of gold, with the US dollar serving as the world’s reserve currency. The Bretton Woods Agreement, signed in 1944, established this system, but it became unsustainable as the US accumulated large trade deficits and inflation soared. In 1971, President Nixon ended the convertibility of the US dollar into gold, and the world’s currencies became free-floating.
After this change, currency trading began to be conducted more actively by banks and multinational corporations to manage their foreign exchange risk. The creation of the Euro in 1999 further increased the trading volumes of the foreign exchange market, as the new currency became one of the most widely traded currencies.
In recent years, advances in technology have made foreign exchange trading accessible to a wider range of participants, including retail traders who can now trade currencies from their homes using online trading platforms. The forex market is now the largest financial market in the world, with an average daily turnover of over $6 trillion.
Practice Questions
1. When was the Bretton Woods Agreement signed?
A) 1971
B) 1944
C) 1999
D) 1960
Answer: B) 1944
2. What was the main cause for the end of the Bretton Woods Agreement?
A) The US dollar losing its status as the world’s reserve currency
B) The accumulation of large trade deficits by the US
C) The depreciation of gold’s value
D) The rise of inflation in the US
Answer: D) The rise of inflation in the US
3. When did the modern foreign exchange market emerge?
A) In ancient times
B) In the 1970s
C) In the 1990s
D) In the 1940s
Answer: B) In the 1970s
4. What effect did the creation of the Euro have on the forex market?
A) It decreased trading volumes
B) It had no effect
C) It increased trading volumes
D) It made currency trading illegal
Answer: C) It increased trading volumes
What has made foreign exchange trading accessible to a wider range of participants in recent years?
A) The end of the Bretton Woods Agreement
B) Advances in technology
C) The creation of the Euro
D) Changes in government regulations
Answer: B) Advances in technology
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