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 ?
While President Nixon removed the gold/dollar Bretton Woods linkage in 1971 and inaugurated the era of floating exchange rates, gold has been a hedge against inflation for everyone from Texan oil billionaires to Chinese peasants.
Some analysts predict that emerging market and developing countries can weather the storm through floating exchange rates, the development of local bond markets, interest rate hikes, or by using some of their foreign exchange reserves.
In either case, the sovereigns that are best placed to withstand those challenges will be those that have the greatest policy flexibility and a wide array of counter-cyclical policy tools, including floating exchange rates and large foreign exchange reserves," says Lucio Vinhas de Souza, a Moody's Managing Director - Chief Economist and author of the report.
Because of various transaction costs, floating exchange rates, and barriers such as tariffs, a metric known as the "purchasing power parity exchange rate" is applied to put purchasing power for different countries on an even footing.
Exogenous currency choice results in stark outcomes, like the optimality of floating exchange rates under producer-currency pricing which ensures expenditure switching, and pegging under local-currency pricing which preserves the law of one price.
This changed with the advent of floating exchange rates in the early 1970's, which allowed more stability-conscious countries, such as Germany, to decouple from a US monetary policy that they considered too inflationary.
Countries that are fully integrated into the global financial system and have freely floating exchange rates are likely to suffer the most, while countries such as India and China that follow managed exchange rates and have government bonds priced in domestic currencies are better protected, as currency risk acts as a deterrent.
I simulate the calibrated economy under monetary and productivity shocks, and I compare three different exchange rate regimes--that is, hard pegs, managed exchange rates, and floating exchange rates.
Countries implementing fixed exchange rates regime had been affected more by economic crisis than countries which implemented floating exchange rates regime, he said.
The rest have either gone for fixed-rate exchange mechanisms, among them Bulgaria, or floating exchange rates, as was the case with the bigger economies in the region.
Following the widespread acceptance of floating exchange rates in the mid-1970s, the IMF redefined the SDR as weighted average of the U.
Since the collapse of Bretton Woods in 1971, the global economy has tried to function with floating exchange rates, in which the ''market'' is said to set currency prices.