The history of the Forex market dates back to the days of barter economy. In the barter economy, goods had a value in goods to be taken as exchange. With the later invention of money and increase in national and international trade, the value of a commodity began to be expressed with a monetary value. This situation led to the requirement of determining an equivalent value for currencies of different countries in international trade. The increasing volume of international trade in the 20th century brought with it the fixing of the currency of each country to Gold prices. However, problems in the system in question led to the signing of the Bretton Woods agreement, where currencies were fixed to both Gold and the American Dollar.

 

Bretton Woods Agreement

The currencies of the countries party to the agreement and accepting to fix their national currency to Gold prices began to gain value against the American Dollar. The Dollar has maintained its validity a the only national currency convertible to Gold. According to the agreement, 1 ounce Gold = 35 dollars or 1 dollar= 0.88867 grams of Gold.

The agreement allows any country the ability to change the value of their currency against the Dollar only in cases of asymmetric monetary shocks. The devaluation and revaluation rates foreseen for such fluctuations is limited to 10 percent. Exceeding 10 percent has been made subject to special permission to be received by the country from the IMF.

 

Smithsonian Agreement

With this agreement, the value of the American Dollar has been reduced by 8 percent compared to foreign currencies. However, in a short period of time, the devaluation rate of the American Dollar was found to be insufficient. As a result of speculative attacks against the Dollar, on 12 February 1973, the American Dollar was again devalued by 10 percent. With the move in question also being insufficient, the currency markets were forced to close between 1-18 March 1973. With the reopening of the markets on 19 March, Asian and European currencies were allowed to fluctuate freely against the Dollar. While this was initially thought to be a temporary development, it is considered the start of a new period (flexible exchange rate).

All these regulations allowed for exchange rates to move freely, and are the building blocks of the flexible exchange rate system. Today, currencies can be independently bought and sold from other country currencies. This case positively affects the effectiveness and depth of the Forex market. The main participants of the Forex market, where foreign currency can be freely bought and sold, can be listed as private/public banks, central banks, individuals and companies attempting to protect themselves from currency risks and individual investors carrying out for-profit (speculative investment) transactions.



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