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.
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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.
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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.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.
References in periodicals archive ?
The quite limited role of foreign currency reserves in New Zealand, as in many advanced economies with freely floating exchange rates, is consistent with the monetary policy framework and open financial account.
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.
The sum of the two measures is a measure of the degree of monetary policy discretion under freely floating exchange rates.
Adding the contributions of the Dutch and German policy shocks together, we get an indication of how large the degree of monetary policy independence may be in terms of macroeconomic stabilization capabilities in case of freely floating exchange rates. The degree of monetary policy autonomy with respect to output stabilization is approximately 20%.
A target zone is an intermediate exchange rate regime between two corners of the "impossible triangle," namely monetary union on the one hand and freely floating exchange rates on the other hand.
The essential point is that freely floating exchange rates clear foreign exchange markets without central planning.
If China adopted freely floating exchange rates, its currency would probably appreciate somewhat more than it has on a trade-weighted basis and, perhaps, relative to the dollar.
Since the breakdown of the Bretton Woods system and the subsequent short-lived experiment with freely floating exchange rates, international monetary arrangements have been characterized by a wide variety of intermediate exchange rate systems.
Under a system of freely floating exchange rates, therefore, the observed change in the exchange rate provides a measure of the extent of external imbalance.
Many advocates of the use of exchange rates as nominal anchors for expectations about economic policies have been forced by recent events to retreat somewhat from their advocacy; it would be unfortunate if the pendulum now swung to the other extreme of absolutely freely floating exchange rates. The search for a workable, happy medium must continue.