In order to gain a complete understanding of what foreign exchange is, it is useful to examine the reasons that lead to its existence in the first place. Exhaustively detailing the historical events that shaped the foreign exchange market into what it is today is of no great importance to the forex trader and therefore we happily will omit lengthy explanations of historical events such as the Bretton Woods accord in favor of a more specific insight into the reasoning behind foreign exchange as a medium of exchange of goods and services.
Historically our ancestors
conducted trading of goods against other goods this system of bartering
was of course quite inefficient and required lengthy negotiation and searching
to be able to strike a deal. Eventually forms of metal like bronze, silver
and gold came to be used in standardized sizes and later grades (purity)
to facilitate the exchange of merchandise. The basis for these mediums
of exchange was acceptance by the general public and practical variables
like durability and storage. Eventually during the late middle ages, a
variety of paper IOU started gaining popularity as an exchange medium.
The obvious advantage of carrying around 'precious' paper versus carrying around bags of precious metal was slowly recognized through the ages. Eventually stable governments adopted paper currency and backed the value of the paper with gold reserves. This came to be known as the gold standard. The Bretton Woods accord in July 1944 fixed the dollar to 35 USD per ounce and other currencies to the dollar. In 1971, president Nixon suspended the convertibility to gold and let the US dollar 'float' against other currencies.
Since then the foreign
exchange market has developed into the largest market in the world with
a total daily turnover of about 1.5 trillion USD. Traditionally an institutional
(inter-bank) market, the popularity of online currency trading offered
to the private individual is democratising foreign exchange and widening
the retail market.
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