What is 'Joint Float'

A joint float occurs when two or more countries agree to keep their currencies at a same exchange rate relative to one another, but not relative to other countries. This is done when the central banks of two ore more different currencies set their currency rates as somewhat relative for each other. So, for example, the U.S. might set their currency rate as somewhat equal to Canada, meaning one U.S. dollar would approximately equal one Canadian dollar.

The countries involved in a joint float agreement form a sort of partnership where their currencies move jointly. The central banks of the countries participating in this agreement maintain the joint float by buying and selling each other’s currency. Purchasing relevant purchases and buying each other’s currencies supports the joint float relationships.

BREAKING DOWN 'Joint Float'

The joint float also allows the set currencies to move in response to the supply and demand in the financial exchange market, while still staying similar to each other. Essentially, even if their exchange rate to other currencies has to change, their currency rate to each other would stay the same.

Countries that decide to link their currencies do it for various reasons. For example, a small country next to a larger one will be affected more severely by currency exchange rates. In this case, a minimal shift from one currency to another will impact the price of the currency in the smaller country more than it would impact the larger country. The goal is that if the countries form a joint float by linking their currencies to form a fixed exchange rate, their currencies become stronger and better able to withstand currency fluctuations.

Example of a Joint Float

West Germany, France, Italy, the Netherlands, Belgium and Luxembourg created a European joint float in 1972. The 1972 joint float was nicknamed the snake and it was created to try to help these European countries move away from their dependency on the U.S. dollar. The idea was to keep their currency rates within 2.25 percent of each other, but still allow their rates to float with other currencies like the dollars.

The Joint Float was replaced by the European Monetary System in 1979. However, despite the fact that the name changed, the way the European Monetary System works is very similar to the joint float. All of the nine countries in the system operate within a basket of fixed currencies.

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