What is a floating exchange rate?
Floating exchange rate is a exchange rate that can move in response to market pressures. The exchange value of the currency in question is determined by activities on the foreign exchange market, causing the increase and decrease in its value. On the other hand, a fixed exchange rate is determined by the government, usually by attaching the currency value to the value of the currency unit, such as the United States. As market pressures move and the value rises and decreases, the economy should theoretically remain stable. In practice, things are not so simple. While many nations use a floating exchange rate, the rate can be highly volatile and can have a deep impact on the local economies. Especially if the nation enters the economic tail, there may be a brutal floating exchange rate for citizens, as they can find that their purchasing power is reduced.
In the truly independent slack of the exchange rate, the value of the currency is intended only on the foreign exchange market. It changes in response to the supply and demand of the currency, economic activities in the nation of origin and a wide range of other factors,Including total financial depression and similar events.
More often nations use the so -called correct floating exchange rate. In this case, the value of the currency is intended for the foreign exchange market, but the government may intervene. For example, if the currency offer is excessive, it reduces the value of down, the government can remember part of the currency into reserves to reduce the supply and thus increase demand and value. Similarly, if the exchange rate rises too high in the opposite direction, currency reserves can be issued to increase the offer.
Governments are working carefully on the management of the exchange rate. They do not want to interfere too much and create an artificial exchange rate, but also do not want to stand on the sidelines and in case of a problem they fail to intervene. Government officials usually check the situation regularly to decide which steps, if they exist, have to take the currency as stable as possible. Usually qualified economists are involved in these decisionsEven politicians and this process can become very complicated for government representatives.