Floating Exchange Rate


A floating exchange rate or fluctuating exchange rate is a type of exchange rate regime wherein a currency’s value is allowed to fluctuate according to the foreign exchange market. A currency that uses a floating exchange rate is known as a floating currency. A floating currency is contrasted with a fixed currency.

In the modern world, the majority of the world’s currencies are floating. Central banks often participate in the markets to attempt to influence exchange rates. Such currencies include the most widely traded currencies: the United States dollar, the euro, the Norwegian krone, the Japanese yen, the British pound, the Swiss franc and the Australian dollar. The Canadian dollar most closely resembles the ideal floating currency as the Canadian central bank has not interfered with its price since it officially stopped doing so in 1998. The US dollar runs a close second with very little change in its foreign reserves; by contrast, Japan and the United Kingdom intervene to a greater extent.

From 1946 to the early 1970s, the Bretton Woods system made fixed currencies the norm; however, in 1971, the United States government would no longer uphold the dollar exchange at 1/35th of an ounce of gold, so that the US dollar was no longer a fixed currency. After the 1973 Smithsonian Agreement, most of the world’s currencies followed suit. Few countries fixed their currency with another currency, however, lately some of these countries are causing their economy to slow it’s growth. For example, most of the Gulf States had their currency fixed with the US Dollar, and by this strategy it resulted in one outcome, that is dragging their currency value down with the US Dollar declining value. A floating currency is one where targets other than the exchange rate itself are used to administer monetary policy. See open market operations.

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