Sunday, August 21, 2011

Landmarks in the Forex History

Graph showing U.S. dollar and Japanese yen exc...Image via Wikipedia

Some of the main landmark events in the forex history without which the forex market wouldn’t be the same as we know it today are the so-called Plaza accord and Louvre accord. They had very powerful influence on the principles of modern currency trading.

Plaza Accord or Plaza Agreement is the agreement between the USA, France, Germany, Great Britain and Japan about the coordination of efforts in order to adjust the exchange rates, signed in 1985 at the Plaza Hotel, New York. The essence of the Plaza Accord for the currency market development was the revaluation of the existing exchange rate system.

According to the Plaza Agreement, US dollar was depreciated in relation to the G-5’s and Japanese currencies. This was achieved by these countries’ central banks intervention in the currency markets.

The aims of the Plaza Accord were to reduce the current account deficit in the USA and to drag the US economy out of recession. As a result, US currency was devalued for about a half of its previous value, while European and Japanese currencies were, on the contrary, revalued for 50%.

The key significance of the Plaza Agreement and exchange rate adjustment lied in the cooperation between the world countries in the economic terms. This was the rise of the economic globalization which continued and deepened in future.

The Louvre Accord (signed in 1987 in Paris) is an agreement between the USA, Germany, France, Great Britain, Japan, and Canada about the coordination of G-6’s currency interventions aimed at supporting their exchange rates and stabilizing the US dollar which was depreciating. The Louvre Accord followed the Plaza Accord.

What made the Plaza Accord different from the Louvre Accord is the fact that the Plaza Accord was a trade agreement aimed at currencies exchange rates adjustment to meet the suitable trade levels for all the countries. While the Louvre Accord focused not only on readjustments, but also on synchronization of fiscal and monetary policies within all countries on the macroeconomic level.

There were three goals that the Louvre Accord was striving to achieve: to balance the currency market and thus the whole world economic system, to introduce coordinated world monetary consultations in case US dollar declined more than 5% and to stabilize the monetary system for the least developed countries thus promoting their growth. All these goals were supposed to be achieved in case the world monetary coordination prescribed by the Louvre Accord was consistent and permanent.

The Louvre Accord was the world’s final attempt to establish a fixed exchanged rate – an attempt that failed which proved that no more measures should be taken in that direction. Finally, the world once and for all became aware of the inevitability of implementing the floating exchange rate, in which the market forces of demand and supply form the price for a certain currency in the foreign exchange market.

Alexander Collins is a CEO of Forexeasystems and developer of currency trading strategy ProFx and another auto forex trading software as EA Shark and EA Sigma.

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