The History of the Modern Exchange:
What You Can Learn from the Top Dollar Trends of All Time

Posted 06/05/2009, 9:00 am EST by Chuck Butler from

If you ask a Forex trader when the modern currency markets began, you’ll likely hear several different histories. Some might say the currency market as we know it today began in the late 90s when retail investors could finally start trading on the Forex market. Others might say the currency market began in 1971, when President Nixon took the U.S. off the gold standard.

But the fact is, it goes back much further to the Bretton Woods Agreement in 1944.

The Golden Age of Dollars

The Bretton Woods Agreement was an international currency accord. It obliged the U.S. to balance its money supply with the amount of gold the country held in reserve.

Under the Bretton Woods Agreement, the U.S. dollar was pegged to gold at US$35 per ounce and all other currencies were pegged to the dollar at fixed rates. The U.S.’s gold reserves backed every dollar’s value. Therefore, at least in principle, foreign governments could exchange US$35 for an ounce of gold.

The gold standard maintained order for the next three decades. During that entire time, it was nearly impossible to create a trade imbalance between two countries. Yes, the gold standard worked nicely until August 1971.

A Brave New World of Free-Floating Currencies

In August 1971, President Nixon officially suspended this gold standard. He "closed the gold window" because the U.S. had built up debts they could no longer pay off in gold.

Once the gold standard was out of the way, the U.S. could repay its debts with freshly minted dollars ¡X backed by nothing but U.S. policy. With no leash to rein in debt, the U.S. was off to the races and started creating debt as fast as the printing presses would move.

Foreign countries’ policymakers started to take notice. Most countries dropped their allegiance to the dollar, and depegged their currencies. At that point, most currencies turned "fiat." This means arbitrary government policy backed each individual currency instead of gold.

The age of paper money had begun. And thus, the first currency trend in history started to take shape…

The Dollar’s First Bear & Bull Market

As luck would have it, the first currency trend in history happened to be a weak dollar trend from 1971 to 1978. During this dollar bear market, the Swiss franc gained 186% versus the dollar, while a combo of German d-Marks, Swiss francs, and Japanese yen gained 131% against the dollar as a whole.

But of course this dollar bear didn’t last forever. By 1978, inflation was completely out of control in the United States. Interest rates began to move higher, and finally made U.S. assets appealing to foreign investors again.

The rush of foreign money propped up the dollar. In fact, this influx of foreign capital caused the first dollar bull market since Nixon took us off the gold standard. This dollar bull lasted from 1978 to 1985.

So-Long Strong Dollar!

However, this dollar bull market was too good to last. In the 80’s, Reaganomics eventually weighed on the dollar. Deficit spending became the norm. By 1985, the U.S. current account deficit had grown to a whopping 2.5% of GDP. (Today, the current account deficit is 6% of GDP!)

At that time, the U.S. deficit had grown to a size that warranted a weaker currency, but the dollar was still annoyingly resilient. In short, the strong dollar had to go.

So, ministers from the G-7 nations met in the Plaza Hotel in New York City to figure out how to knock the dollar lower. They eventually decided to coordinate an effort with major industry players to sell off the dollar, in a decision known as the "Plaza Accord."

Traders around the world were happy to comply with the Plaza Accord and force the dollar lower. They proceeded to dump the dollar for the next 10 years, from 1985 ¡X 1995. During those 10 years, the Swiss franc gained 138%, and our simple combo of: d-marks, francs, and yen, gained 171%.

"Our Best Dollar Interests"

By 1995, traders had officially been selling off the dollar for a decade. U.S. Treasury Secretary Robert Rubin decided he’d had enough, so he began his campaign to strengthen the dollar. Sec. Rubin’s famous line was, "a strong dollar is in the best interests of the U.S." He pounded this idea into the currency markets on a daily basis.

Traders began to fear that the U.S. Treasury would "intervene" in the markets if they continued to sell the buck, and hurt the dollar short sellers. And thus, the last complete currency trend began.

For seven years, the markets adhered to Robert Rubin’s "strong dollar policy." The dollar gained back 30% of its losses. Plus, a new tech bubble poured money into the dollar on a daily basis.

The Most Recent Dollar Bear Market

All trends begin with a fundamental reason, and they don’t end until that fundamental reason changes. That’s exactly what happened with the current dollar bear market. In 2002, Robert Rubin left the Treasury, the stock market bubble popped, and the dollar lost all its artificial supports. Thus, we began the current great dollar bear market.

From 2002 to the present, the dollar has lost 41% against the world’s major currencies. But on the positive side, anyone betting against the dollar has raked in the profits.

One Step Ahead of the Crowd

Here’s the real tragedy: Most Americans believe the dollar was relatively strong until as recently as 2002. But by reading this, you’re already one step ahead of the crowd. As you can see from this history, the dollar has only had two major bull markets, and even then, the dollar continued to trend downward.

Plus, as you can see, these bullish and bearish trends have repeated themselves over time. The dollar has yo-yoed between being the strongest gold-backed currency on earth and a debtor currency. Makes you wonder what the next 10 years will hold in store for our money doesn’t it?

The good news: Once you understand the past, you can predict the future. You can also predict what currencies will rise against the dollar next.

EDITOR’S NOTE: This article originally appeared in World Currency Watch’s monthly newsletter, The Currency Capitalist.

About the Author: Chuck Butler is a senior editor for Currency Capitalist and a daily writer for FX University. He’s also the President of EverBank World Markets and long-time editor of his own daily E-Letter, A Pfennig for Your Thoughts. A regular speaker at financial events, Chuck focuses on the factors that affect a currency’s value over the long run – from trade and fiscal balances to interest-rate policy and credit expansion. Because of his concentration on the fundamentals, he has correctly called the dollar’s demise and the euro’s rise since 2001, as well as many other important long-term moves.