Spot Forex: The Free-Floating System
The Beginning of the Free-Floating System
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| Signing the European Monetary System agreement at the Bank for International Settlements, 13 March 1979. |
In December of 1971, following the demise of the Bretton Woods Accord, the Smithsonian Agreement was created. Similar to the Bretton Woods Accord, but more flexible, this agreement opened the doors for a greater currency fluctuation band.
In 1972, the European community made an effort to move away from its dependency on the U.S. dollar. The European Joint Float was established by West Germany, France, Italy, the Netherlands, Belgium and Luxemburg. Both the European Joint Float and Smithsonian Agreement collapsed in 1973 for many of the same reasons that lead to the failure of the Bretton Woods Accord. With no new agreements to replace them, there was a switch to a free-floating system. In 1978, this system was officially mandated, allowing governments to peg or semi-peg their currencies, or simply allow them to freely float.
That same year, European countries created the European Monetary System in one last effort to gain independence from the dollar. It failed in 1993, but spurred an evolution from a combination of the EMS and the Bretton Woods Accord.
Today, the major currencies move independently from other currencies. Currencies such as the U.S. dollar, euro, British pound, Swiss franc and the Japanese yen are traded by anyone who wishes to do so — from brokerage houses to individuals. It is only occasionally that some of the central banks intervene or attempt to move currencies to their desired levels.
However, the single most integral factor that drives today's forex markets is supply and demand. The free-floating system is ideal for today's forex markets. Three factors drive the supply and demand of currencies: interest rates and interest rate differentials, commodities and global trade. The forex market is the prime market of the world by which all others, such as futures and options, can be considered derivatives.
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THE FREE-FLOATING SYSTEM
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