Introduction to the Forex

The  Forex is the exchange market also called foreign exchange market. Its name comes from the contraction of « Foreign Exchange ». It is the second more important financial market after the interest rate one.

With globalization and the important increase of international exchanges, the Forex considerably grows; today the daily exchanges are huge. IN 2007, according to the Bank for International Settlements’ (BIS) three-yearly study, they represented $3,500 billion.

Before 1944, there was no rating between currencies as it exists today. It was only possible to convert currencies in gold.

In 1944, the Bretton Woods Conference gathered 44 countries in order to restore the economic stability weakened by the 1926 crisis and World War II. During this conference, the IBRD (International Bank for Reconstruction and Development), the Wolrd Bank and the IMF (International Monetary Fund) were created. At the end of the Bretton Woods agreements, the dollar begins its hegemonic reign as it becomes the only currency that can be converted in gold ($35 the ounce of gold) and the other currencies are rated -/+1% according to dollar.

On April, 10th 1972, the European Currency Snake (ECS) was created during the Basle Agreement. Its aim is to fix +/- 2,25% fluctuation bands between the currencies of the  European Economic Community (EEC) and dollar too. The signatory countries expect to protect themselves against speculative flows.

At the same time, dollar keeps collapsing. In fact, the United States only needs to print money to pay for the imports done in dollar; that lead to a devaluation of dollar.  In spite of several devaluations, the United States has to give up the fixity of several currencies exchange rates according to dollar standard and adopted the floating exchanges.

In 1979, the European Currency Snake (ECS) is replaced by the European Monetary System  ( EMS). The currencies of the EEC countries are no longer linked between themselves but to the ecu, the ancestor of the euro. The fluctuation bands are still +/-2.25% according to the ecu, devaluations between currencies and the ecu are possible.

At the beginning of the 90s, after the reunification, Germany was very flourishing and the Deutsche Mark has a predominant place in the ECS as it is the reference for the other currencies. Germany increases its interest rates to control the inflation but it is a problem because the other ECS countries (Great Britain in particular) are also concerned by an economic crisis so they want low interest rates. This situation is no longer bearable and George Soros, who is aware of it, shorts £10 billion on September, 16th 1992 in order to make the pound sterling leave the ECS.  The Bank of England can’t cope with it, so the pound sterling leaves the ECS and is devalued; that way, Soros has a billion-dollar gain. Following this event, Georges Soros is nicknamed “the man who blows up the Bank of England”. 

Other similar speculative attacks forced the countries to extend the fluctuation bands to +/- 15% and the ECS ended during the summer 1993.

ON January, 1st 1999, the euro appears as a virtual currency replacing the 11 signatory countries’ on the financial market, and begins to circulate on January, 1st 2002 under its paper form.

Despite the great development of euro, dollar is still the hegemonic currency :

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