What is 'Managed Currency'

A managed currency is one whose price and exchange rate are influenced by some intervention from a central bank.

BREAKING DOWN 'Managed Currency'

Most of the world’s currencies participate to some degree in a floating currency exchange system. In a floating system, the prices of currencies move up and down relative to each other based on external foreign exchange market forces. For example, when you travel to foreign countries, the amount of foreign currency you can exchange your dollar for will vary depending on the fluctuations taking place in this market.

When these price changes occur without any outside government influence in the form of intervention by central banks, it is known as a clean float. A clean float is a product of free economics, or laissez-faire economics, where price is determined solely by the forces of supply and demand in the world market.

Virtually no currencies truly fall into the clean float category. Most of the major world currencies are managed at least to some extent—including the US dollar, the euro, the British pound and the Japanese yen—though the degree to which different nations’ central banks intervene varies. The Chinese yuan was the last major currency to use a fixed currency system—a system in which currencies are pegged to the price of a commodity, such as gold, or another currency or a basket of currencies. China discontinued this policy in 2005 in favor of a form of the managed currency system.

Why use managed currency?

A true floating currency exchange can be accompanied by a certain amount of volatility and uncertainty. For example, external forces beyond government control, such as the price of commodities like oil, can influence currency prices. To mediate some of this uncertainty, governments will intervene to gain more control over their own monetary policies and stabilize their markets.

For example, a country may control its currency by allowing it to fluctuate between a set of upper and lower bounds. When the price of the currency moves outside of these limits, the country’s central bank may purchase or sell currency to affect the price and rein it in. 

In some cases, the central bank of one government may step in to help manage the currency of a foreign power. For example, in 1994, the US government bought large quantities of Mexican pesos to help boost the currency and avert economic crisis when the Mexican currency began to lose value rapidly.

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