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 ?
Indeed, the Argentine central bank intervened in this manner with such aplomb that from 1994 to 2001 its domestic credit position was over six times more volatile than that of Chile's central bank, which plainly has an independent monetary policy and has had a floating exchange rate since 1999.
Do the current monetary arrangements -- which feature a floating exchange rate and an inflation target to tie down the independent monetary policy that results -- maximise growth?
In a statement, the central bank said, 'At present, Russia has a floating exchange rate regime.
"We have floating exchange rate and the National Bank is an active player at the foreign exchange market.
"We think that this suggestion is worth studying, but we have not decided to change the existing managed floating exchange rate regime," Dai told a news conference.
Central bank governor, Rodrigo Vergara, said, 'We have a floating exchange rate policy and as such it isn't part of the central bank's normal policy to intervene in the currency market, and the truth is that we're not even close to thinking about doing it.
However, given the intention to move to a floating exchange rate, the rate's long-term trend will depend on macroeconomic developments, with the recent tensions in Ukraine introducing downside risk.
To avoid, or at least minimize, extreme exchange rate volatility, the Manila-based bank said a floating exchange rate could induce banks and corporations to hedge their foreign currency debt, and a currency board or currency union could permanently eliminate unexpected currency fluctuations.
A top official with the central bank said, 'The central bank is now gradually switching to a floating exchange rate. That means that the existing rouble trading corridor will be scrapped by 2015, while interventions will be carried out more rarely.'
"The situation at the foreign exchange market of the Kyrgyz Republic is different, since our country has floating exchange rate, which proved its effectiveness in adaptation to changes at the world markets and in domestic macroeconomic situation.
Japanese Finance Minister Kiichi Miyazawa has called for reforming the current floating exchange rate mechanism, under which currency rates have been allowed to fluctuate wildly at the whim of global speculators.
Such fluctuations of currency exchange rates is a normal thing in the countries with floating exchange rate and are connected with market situation for a certain period of time.