History is the key to understanding the present and building the future. The forex market is a clear example of this. It did not appear overnight, but was formed over decades through economic changes, international agreements, and financial transformations until it reached its massive electronic form today. In the following lines, we will review the most important stages that shaped this market, using clear language and a simplified chronological order.
1- The World After World War II
World War II ended in 1945, leaving the world immersed in widespread destruction and heavy debt. Most countries emerged with exhausted economies, while the United States was the least affected and the strongest, as it possessed a powerful industrial base and large gold reserves. This advantage made it the most qualified country to lead the new global financial system.
2- The Bretton Woods Agreement (1944–1971)
In 1944, representatives of 44 countries met in Bretton Woods, United States, to design a financial system that would ensure stability. The result was a historic agreement based on three main pillars.
First, fixing exchange rates and linking them to the US dollar.
Second, linking the US dollar to gold at a fixed price of 35 dollars per ounce, convertible between governments and central banks.
Third, establishing the International Monetary Fund and the World Bank to support and assist countries.
This system provided global monetary stability for more than a quarter of a century and made the US dollar the world’s primary trusted currency.
3- The Nixon Shock and the End of the System (1971–1973)
With the late 1960s, economic pressure on the United States began to intensify due to the high costs of the Vietnam War and the growing budget deficit. At the same time, many countries started demanding the conversion of their US dollar holdings into gold, but the American gold reserves were no longer sufficient.
On August 15, 1971, President Richard Nixon announced the suspension of the dollar’s convertibility into gold, a move that became known as the Nixon Shock. This decision shook the existing monetary system and effectively marked its end. An attempt to save the system was made through the Smithsonian Agreement in December 1971, but by 1973 most countries had no choice but to float their currencies and allow their values to be determined by supply and demand.
This marked the beginning of the era of fiat money, where currencies were no longer backed by gold but by economic strength and trust.
- The Emergence of the Modern Forex Market
After the shift to floating exchange rates, the US dollar became the central axis of global trade and international pricing. Major currencies emerged against it, such as the British pound, the Japanese yen, the Swiss franc, the Canadian dollar, and the Australian dollar, and later the euro in 1999. From this point, the concept of currency pairs like EUR/USD and GBP/USD was established. Strategic commodities such as oil and gold also began to be priced in US dollars, which further strengthened its global dominance.
From Bank Swaps to an Electronic Market
In its early stages, currency trading was conducted between major banks through closed networks and direct communication channels. With technological advancements during the 1980s and 1990s, followed by the spread of the internet, the market transformed into a global electronic platform accessible to institutions and individual investors. Today, the forex market operates 24 hours a day, five days a week, moving between financial centers in Asia, Europe, and America. Daily trading volume exceeds trillions of dollars, making it the largest and most liquid market in the world.
What Do We Learn From History?
The history of the forex market carries important lessons for traders. The dominance of the US dollar did not happen by chance, but as a result of a long historical process, and its influence is still present in almost every currency pair. The monetary system itself is not fixed. It shifted from gold to the dollar, and from fixed exchange rates to floating currencies, reminding us that market rules change over time. Technological development has provided the market with extreme speed and deep liquidity, which requires strong risk management discipline and awareness of trading opportunities.
The forex market did not emerge out of nowhere. It is the result of decades of economic arrangements and international decisions, starting from the Bretton Woods Agreement and the gold standard, through the Nixon Shock, then the move to floating currencies in 1973, and finally the modern electronic forex market. Today, the US dollar remains the beating heart of this market, while historical understanding remains a key tool that gives traders deeper insight into market behavior and helps them make wiser decisions in a fast and constantly changing world
