floating exchange rate system

Floating exchange rate system

Purchase or sale of the currencies of other nations by a central bank for the purpose of influencing foreign exchange rates or maintaining orderly foreign exchange markets. Also called foreign-exchange market intervention.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

Floating Exchange Rate System

The practice in which a central bank buys and sells one or more foreign currencies in order to affect the exchange rate of its own currency. To give a very simple example, if a central bank believes its own currency is overvalued, it may buy other currencies on the open market to increase demand and therefore the price of these currencies. The extra demand will likely drive down the exchange rate of its own currency to a lower level.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

floating exchange rate system

a mechanism for coordinating EXCHANGE RATES between countries' currencies which involves the value of each country's currency in terms of other currencies being determined by the forces of supply and demand in the FOREIGN EXCHANGE MARKET (see EQUILIBRIUM MARKET PRICE). Over time the exchange rate of a particular currency may rise (appreciate) or fall (depreciate) depending, respectively, on the strength or weakness of its underlying BALANCE OF PAYMENTS position and exposure to SPECULATIVE activity See APPRECIATION, definition 2, DEPRECIATION, definition 2.

Generally speaking, the business and financial community dislikes unregulated floating exchange rates since the market tends to produce erratic and destabilizing exchange rate movements, often prompted by currency speculation, which makes it difficult to conclude meaningful trade and investment transactions, because of the uncertainties surrounding the profit-and-loss implications of such deals when exchange rates are fluctuating widely. Governments too dislike disorderly currency markets and prefer where possible to ‘manage’ their exchange rates both to moderate the excessive short-term fluctuations and to smooth out the underlying longer-term trend line by buying and selling currencies as appropriate out of their foreign exchange equalization account. While this creates a more settled and controlled environment in which to operate, nonetheless firms are usually forced to cover their currency deals in the forward exchange market.

Government intervention in currency markets sometimes goes beyond merely smoothing its exchange rate and may involve a deliberate attempt to manipulate the exchange rate so as to gain a trading advantage over other countries (a so-called dirty float). See FORWARD MARKET, INTERNATIONAL MONETARY FUND, ECONOMIC POLICY, CENTRAL BANK, GROUP OF 7 (G7), PURCHASING POWER PARITY, EXCHANGE RATE EXPOSURE.

Collins Dictionary of Business, 3rd ed. © 2002, 2005 C Pass, B Lowes, A Pendleton, L Chadwick, D O’Reilly and M Afferson
References in periodicals archive ?
It had to restructure its debts, secure fresh loans, and implement a floating exchange rate system. To contain inflation, interest rates were raised and excess liquidity was mopped up through high-yield CB Certificates of Indebtedness that encouraged savings and investments.
China will steadfastly deepen the market-oriented reform of its currency exchange rate, continue to improve the floating exchange rate system based on the market supply and demand and with reference to a basket of currencies, and work to keep the renminbi exchange rate basically stable, reasonable and balanced, Lu said.
Neighboring countries like India, Bangladesh, Sri Lanka, Afghanistan and Myanmar are already practicing managed floating exchange rate system. Accordingly, Pakistan policy makers are confronted with a big question: whether to retreat to market determined currency rate immediately or to delay it till the macro-economic stability is achieved.
Under a floating exchange rate system countries are more insulated from other countries' macroeconomic problems.
Then a managed floating exchange rate system was adopted in January 1982.
The BSP official noted that the central bank continued to adhere to a freely floating exchange rate system.
Korea has introduced the floating exchange rate system and maintained an appropriate level of foreign reserves.
(10) Friedman's argument that a floating exchange rate system allows national policymakers to be democratically accountable is almost always overlooked in the literature on exchange rate regimes.
The currency dropped by 50% against the dollar after the authorities announced shifting to a floating exchange rate system, which pushed up the cost of imported goods.
From a different approach, among the models of exchange rate determination, the monetary approach has been used to explain volatility occurring after implementation of the floating exchange rate system in 1973 (Wilson, Journal of Business Inquiry, 2009).
After the Azerbaijan decided to pass the floating exchange rate system, manat, the national currency of Azerbaijan is continuing the depreciation.
China's cabinet will maintain a floating exchange rate system and will realise yuan convertibility on the capital account in an orderly way, the statement also said.