Freely floating exchange rate system

Freely floating exchange rate system

Monetary system in which exchange rates are allowed to move due to market forces without intervention by country governments.

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.