Friedman, who had realized that the pound sterling was priced too high against the dollar, wanted to sell the currency and then after that the price of the currency declined, returning to repay the bank to buy it, it is So with a quick profit. The bank’s refusal to grant the loan was due to the Bretton Woods Agreement, established twenty years earlier, which fixed the price of national currencies against the dollar, and set the dollar at a rate of $ 35 per ounce of gold.

The Bretton Woods Agreement, established in 1944, aimed at installing international monetary stability by preventing money from fleeing across nations, and restricting speculation in the currencies of the world. Prior to the Agreement, the gold exchange standard that prevailed between 1876 and the First World War, dominated the international economic system. Under the gold exchange, currencies gained a new phase of stability as they were backed by gold prices. It abolished the centuries-old practice used by kings and rulers of arbitrarily debasing the value of money and cause inflation.

But the gold exchange standard did not lack faults. As an economy strengthened, it would import heavily from abroad until it ran down its gold reserves required to back its money. As a result, the money supply would shrink, interest rates rose and economic activity slowed to the point of recession. Eventually, prices of goods had reached their lowest point, appearing attractive to other nations, that rush into buying excessive, which injected the economy with gold until it increased its money supply, lowering the interest rates and recreate wealth into the economy. These fall-rise patterns prevailed throughout the period of the gold standard until the beginning of World War I interrupted trade flows and free movement of gold.

After the Wars, was held on the Bretton Woods Agreement, in which participating countries agreed to try and maintain the value of their currencies in a narrow range against the dollar and a corresponding rate of gold as needed. Were prohibited from countries devalue their currencies to their trade advantage and were only allowed to do so for devaluations of less than 10%. In the 50s, the volume of international trade expansion led to massive movements of capital generated by post-war construction. That destabilized foreign exchange rates as they had been established at Bretton Woods.

The Agreement was finally abandoned in 1971, and the U.S. Dollar would no longer be convertible into gold. By 1973, currencies of major industrialized nations began to float more freely, controlled mainly by the forces of supply and demand which acted in the foreign exchange market. Prices are set every day on a free exchange rate, with an increase in volumes, speed and volatility of the same during the 70s, giving rise to new financial instruments, market deregulation and trade liberalization .

In the 80s, the movement of capital across borders accelerated with the advent of computers and technology, extending market continuum through the time zones of Asia, Europe and America. Transactions in foreign exchange rocketed from about $ 70 billion per day in the mid-’80s, more than $ 1.5 trillion a day two decades later.

The Explosion of the Euromarket

A major catalyst for the acceleration of Forex trading was the rapid development of the eurodollar market, where U.S. dollars are deposited in banks outside the United States. Similarly, Euromarkets are those where assets are deposited in a currency other than the currency of origin.

The Eurodollar market first emerged in the 50s, when revenues from sales of Russian oil-all in dollars, were deposited outside the United States for fear of being frozen by the regulatory authorities of the States USA. That led to a vast pool of dollars from abroad, outside the control of the authorities of the United States. The U.S. government imposed laws to restrict dollar lending to foreigners. Euromarkets were particularly attractive because they had far less regulations and offered higher yields. Since the late 80s onwards, U.S. companies began to borrow abroad, finding a beneficial Euromarkets where maintaining excess liquidity, providing short-term loans and financing exports and imports.

London was and remains the principal offshore market. In the 80s, became the key center in the Eurodollar market when British banks began lending dollars as an alternative to pounds in order to maintain its leadership position in global finance. The convenient location of London (which operates at the same time as the Asian and American markets) is also crucial to preserving its dominance in the Euromarket.

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