floating exchange rate

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Floating exchange rate

A country's decision to allow its currency value to change freely. The currency is not constrained by central bank intervention and does not have to maintain its relationship with another currency in a narrow band. The currency value is determined by trading in the foreign exchange market.

Floating Exchange Rate

The exchange rate in which the value of the currency is determined by the free market. That is, a currency has a floating exchange rate when its value changes constantly depending on the supply and demand for that currency, as well as the amount of the currency held in foreign reserves. An advantage to a floating exchange rate is that it tends to be more economically efficient. However, floating exchange rates tend to be more volatile depending on the particular currency. A currency with a floating exchange rate may undergo currency appreciation or currency depreciation, depending on market fluctuations. A floating exchange rate is also called a flexible exchange rate. See also: Fixed exchange rate, Crawling peg, Managed float.

floating exchange rate

An exchange rate between two currencies that is allowed to fluctuate with the market forces of supply and demand. Floating exchange rates tend to result in uncertainty as to the future rate at which currencies will exchange. This uncertainty is responsible for the increased popularity of forward, futures, and option contracts on foreign currencies. Also called flexible exchange rate. Compare fixed exchange rate.
References in periodicals archive ?
Economists like flexible exchange rates because they allow financial markets -- rather than governments -- to set the prices of currencies.
It made passing reference to the need for flexible exchange rates, pledging to "stick to our previous exchange rate commitments".
uCaA change in export prices has a greater impact on the debt-to-GDP ratio of countries with flexible exchange rates than it does on those with fixed exchange rates.
Since most emerging markets now operate with flexible exchange rates, they have experienced varying degrees of currency depreciation, posing problems in many cases.
The Manila-based lender warned some developing economies were showing signs of "potential overheating" and said more flexible exchange rates and capital controls could help curb soaring consumer costs and ease pressure on the poor.
Flexible exchange rates were optimal, according to Obstfeld (1996) whether deviations from PPP are due to deviations from the LOP or due to the presence of non-traded goods.
Geithner also said Brazil and other emerging economies with flexible exchange rates and open capital markets ''have born a disproportionate share of both the benefits and burdens of these capital flows.
In addition, the report said it would benefit the broader strategy of increasing domestic demand in China and remove pressures in other emerging economies with more flexible exchange rates.
While Singh supported the US call for flexible exchange rates, another part of his speech seemed to endorse the Chinese position.
The signals that flexible exchange rates send are necessary to support a strong and balanced global economy," he wrote in the letter released by the White House.
Jong-Wha Lee, the Manila-based multilateral lender's chief economist, said that more flexible exchange rates were in the region's interest as persistent global imbalances like the trade deficit in the US and surplus in China would increase the risk of another financial crisis.
Similarly, greater intra-regional policy coordination will facilitate the exit from current expansionary policies as well as the transition to more flexible exchange rates.

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