What is a Joint Float
A joint float is when two or more countries keep their currencies at a set exchange rate relative to one another while allowing them to float on the foreign exchange market (FX).
Joint floats happen when the central banks of two or more countries set their currency rates relative to each other. The countries involved form a partnership, and their central banks maintain the joint float by buying and selling each other’s money. A joint float is a combination of a conventional fixed peg or fixed exchange rate system and a floating rate system. Another name for this type of system is the linked exchange rate.
BREAKING DOWN Joint Float
When countries use a joint float, they agree to link the exchange rate of their currencies to one another. While the agreement allows the currencies to move in response to supply and demand in the foreign exchange market (FX), the rate between the two money will remain stable. Thirty-four countries peg their currency against a single, second currency. These countries include China, Iraq, Venezuela, and the Bahamas.
Some joint floating agreements will specify a band or range of rate movement which is tolerable within the alliance. An example of this type of arrangement includes Denmark (DKK) who pegs to the Euro at a ratio of approximately 7.5 kroner to 1 euro, with a band of +/- 2.25-percent.
Floating the Joint Currency
While the common float currency links to another money, it can move in comparison to other money on the foreign exchange.
- A fixed exchange rate is a system used by a country where the government, central bank, or monetary authority will tie the domestic currency's exchange rate to another country's currency, or in some cases to the price of gold. These fixed rates provide greater stability for smaller and developing countries. The stability allows exporters and importers more certainty on the price of their goods in either the import or export market. Fixed rates can also help the government maintain low inflation, which, in the long run, keeps interest rates down and stimulates trade and investment.
- The marketplace determines the floating exchange rate through supply and demand. The monetary authority will step in less often to adjust the exchange rate of the currency, but this does not mean the bank cannot step in if required. If demand for the money is low, its value will decrease, thus making imported goods more expensive and stimulating demand for local products and services. This, in turn, will generate more jobs, causing an auto-correction in the market. A floating exchange rate is always changing.
Monetary Policy and Joint Float Currencies
Through the use of an exchange rate anchor, a country's monetary authority will buy and sell currency on the FX marketplace to maintain a pre-announced level of exchange. To see a country's monetary authority at work, one need look no further than the U.S. Federal Reserve System (FRS) and its actions through the Federal Open Market Committee (FOMC). The FOMC is the Fed's monetary policy-making body and manages the country's money supply.
The Hong Kong Monetary Authority (HKMA) is another example of monetary control. The Hong Kong dollar (HKD) links to the USD at a set exchange rate of between HK$7.75 to HK$7.85. As an international finance center, HKMA interacts with currencies from around the globe. The authority requires note-issuing banks to deposit an equivalent value of U.S. dollars with the authority before they issue any new notes, thereby keeping the HKD stable.
The International Monetary Fund (IMF) offers a description of the various types of exchange rates and monetary policy frameworks used by countries around the globe. The two currencies which are most often linked are the U.S. dollar (USD) and the euro (EUR).
Joint Floating the Euro
In 1972, West Germany, France, Italy, the Netherlands, Belgium, and Luxembourg created a European Joint Float. Its creation was to help these European countries move away from their dependency on the USD peg. The countries tried to maintain a joint float system within a band of 2.25% of one another, nicknamed the snake. Exchange against the USD had a limit of 4.5% and was known as the tunnel.
The European Joint Float did not account for the differences between the countries involved and the specific pressures on their money. The system collapsed by 1973 and would later find a replacement in the European Union.