Forex

The forex market is not dominated by a single market exchange but involves a global network of computers and brokers from worldwide. Forex brokers act as market makers as well and may post bids and ask prices for a   currency pair that differs from the most competitive bid in the market.

The forex market is an over-the-counter (OTC) market. This means trading happens without a single centralized exchange. Currencies move between those who are trading, although with the support of brokers who provide the means to do so. There exists a substantial amount of interbank forex trading, which helps determine swings in exchange rates. Large banks trade currencies to hedge, adjust balance sheets, and to trade on behalf of clients.

Types of Forex Markets

Three are three key types of forex markets: spot, forward, and futures.

1) Spot Forex Market
2) Forward Forex Market
3) Futures Forex Market

History of the Forex Market

Until World War I, currencies were pegged to precious metals such as gold and silver. During the Great Depression and World War II, the system collapsed and was replaced by the Bretton Woods Agreement. The latter created two international organizations related to global economic activity: the International Monetary Fund and the International Bank for Reconstruction and Development, commonly known as the World Bank. The Bretton Woods meeting also produced the General Agreement on Tariffs and Trade.

The new system also replaced gold with the U.S. dollar as a peg for international currencies. In turn, the U.S. government promised to back up its dollar with equivalent gold reserves. However, the Bretton Woods currency system was discontinued in 1971 when U.S. President Richard Nixon suspended the dollar’s convertibility into gold.

Since then, the forex market has undergone significant changes driven by technological advancements, regulatory developments, and economic events. Currencies have free-floating exchange rates determined by supply and demand in international markets. Despite the many changes since 1971, the U.S. remains the world's  dominant reserve currency.