Until the mid-seventies, major industrial economies were governed by the Bretton Woods agreement of 1944. The Bretton Woods agreement—which was named after the location of the international conference establishing this new monetary order—obliged participating international economies to peg their currencies to the dollar, which itself remained within a 1% standard deviation from the prevailing gold rate.
The architects of the Bretton Woods agreement hoped to prevent countries from artificially devaluating currencies, in order to make goods more attractive in the international marketplace, which led, in part, to a disastrous shrinking of the world economy in the 30s.
The system they established lasted for the next three decades. Shrinking confidence in the dollar, however, lead to a new international monetary system of floating rates, meaning that regular market forces, rather than governmental intervention, would determine the value of currencies. It was from this new system that the modern Forex market arose.
In a floating exchange rate system, market demand determines the relative value of currencies. Such a system is thought of as self-correcting, as any inefficiency is hammered out in the market. If, for instance, global demand for a particular currency falls, goods will become cheaper, and thus the value will begin to rise with the newly created demand.
In a floating exchange system, traders can exploit inefficiencies before the market corrects itself. These traders are called arbitrageurs, and they are able to utilize online brokers to execute their trades. If you are interested in beginning to trade in the Foreign Exchange, please visit our broker’s page to find a broker suitable for you.