Forex is the coming together of banks, businesses, governments, investors and traders to exchange and speculate on currencies. It is the largest and most liquid of all markets. It is the trading of one currency against another. It is not a central marketplace, but an over-the-counter trade. Banks vary in price. Feeds from the different banks are taken into account by a broker who then works on a rough average. The broker effectively performs the transaction, creating the market.
In 1876 it was decided that all currencies should be backed by gold. This was called the Gold Standard. However, linking currencies to the price of gold led to boom-bust patterns. With the outbreak of World War II, most European countries did not have enough gold reserves to back up their paper money. As a result the gold standard was dropped. It was then decided that there would be fixed exchange rates, with the US dollar becoming the primary reserve currency and the only one backed by gold. This was called the Bretton Woods System.
In 1971 the US announced that it would no longer exchange gold for US dollars in foreign reserves. This led to the end of the Bretton Woods System. The breakdown of the system led to the acceptance of floating foreign exchange rates. During the 1990’s foreign currencies became widely electronically traded.
The most important trading centres are London, New York, Tokyo, Zurich, Frankfurt, Hong Kong, Singapore, Paris and Sydney.