Floating Exchange Rate

Loading the player...

DEFINITION of 'Floating Exchange Rate'

A country's exchange rate regime where its currency is set by the foreign-exchange market through supply and demand for that particular currency relative to other currencies. Thus, floating exchange rates change freely and are determined by trading in the forex market. This is in contrast to a "fixed exchange rate" regime.

BREAKING DOWN 'Floating Exchange Rate'

In some instances, if a currency value moves in any one direction at a rapid and sustained rate, central banks intervene by buying and selling its own currency reserves (i.e. Federal Reserve in the U.S.) in the foreign-exchange market in order to stabilize the local currency. However, central banks are reluctant to intervene, unless absolutely necessary, in a floating regime.

RELATED TERMS
  1. Smithsonian Agreement

    An agreement reached by a group of 10 countries (G10) in 1971 ...
  2. Dual Exchange Rate

    A situation in which there is a fixed official exchange rate ...
  3. Big Mac PPP

    A survey done by The Economist that determines what a country's ...
  4. Pegging

    1. A method of stabilizing a country's currency by fixing its ...
  5. Dirty Float

    A system of floating exchange rates in which the government or ...
  6. Fixed Exchange Rate

    A country's exchange rate regime under which the government or ...
Related Articles
  1. Forex Fundamentals

    Understanding the Floating Exchange Rate

    Floating exchange rate is the exchange rate between two currencies at any given time.
  2. Options & Futures

    A Primer On The Forex Market

    Moving from equities to currencies requires you to adjust how you interpret quotes, margin, spreads and rollovers.
  3. Forex Education

    Currency Exchange: Floating Rate Vs. Fixed Rate

    Baffled by exchange rates? Wonder why some currencies fluctuate while others are pegged? This article has the answers.
  4. Bonds & Fixed Income

    6 Factors That Influence Exchange Rates

    Find out how a currency's relative value reflects a country's economic health and impacts your investment returns.
  5. Personal Finance

    5 Places Where Your Travel Dollar Goes Furthest

    The dollar is pretty strong right now, but where is it strongest? Canada? South Africa? Europe? Here are five places to travel to right now on a budget.
  6. Economics

    Understanding the History of Money

    Money has been a part of human history for at least 3,000 years, evolving from bartering to banknotes.
  7. Forex Fundamentals

    How To Calculate An Exchange Rate

    An exchange rate is how much it costs to exchange one currency for another.
  8. Forex Education

    Four Currencies Under the Spotlight in 2016

    With currencies having become the “tail that wags the dog,” in terms of their impact on the global economy, these four currencies will be under the spotlight in 2016.
  9. Forex

    How 2016 Could Be A Disaster for These Currencies

    Tanking oil prices, slowing BRIC growth, and general instability do not bode well for these currencies.
  10. Term

    Why Countries Keep Reserve Currency

    Central banks and financial institutions hold large amounts of foreign money as their reserve currency.
RELATED FAQS
  1. How are international exchange rates set?

    International currency exchange rates display how much one unit of a currency can be exchanged for another currency. Currency ... Read Full Answer >>
  2. What are the goals of covered interest arbitrage?

    The goals of covered interest arbitrage include enabling investors to trade volatile currency pairs without risk as well ... Read Full Answer >>
  3. What risks does a Foreign Institutional Investor (FII) face?

    The term "foreign institutional investor" (FII) normally refers to large, non-Indian companies investing in Indian financial ... Read Full Answer >>
  4. What is the purpose of the International Monetary Fund?

    The stated goals of the International Monetary Fund include offering policy advice to member governments and central banks; ... Read Full Answer >>
  5. Where did the term 'pip' in currency exchange come from?

    The term pip is an acronym for percentage in point or price interest point. It measures a unit of change within a pair of ... Read Full Answer >>
  6. How do changes in national interest rates affect a currency's value and exchange ...

    All other factors being equal, higher interest rates in a country increase the value of that country's currency relative ... Read Full Answer >>
Hot Definitions
  1. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  2. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  3. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
  4. Dark Pool Liquidity

    The trading volume created by institutional orders that are unavailable to the public. The bulk of dark pool liquidity is ...
  5. Godfather Offer

    An irrefutable takeover offer made to a target company by an acquiring company. Typically, the acquisition price's premium ...
Trading Center