Floating currency

Written by Fmi.Online Friday January 6, 2023
A floating currency is a monetary system that is not backed by gold or assets and tends to fluctuate in value due to supply and market expectations. Its value is also determined by global demand and the level of foreign reserves.

Explanation :

Floating currencies have floating exchange rates, which change based on the demand  and supply  mechanisms of the foreign exchange market. When the demand for a currency is high, the currency appreciates in value, thus impacting the country’s exports. A strong currency shifts consumers to a cheaper currency, thus lowering the demand for the exported goods.In the long run, exporters have to lower their prices to attract consumers, thus lowering their profits and facing the risk of going out of business. Conversely, when the demand for a currency is low, the currency depreciates in value, thus impacting the country’s importers. A weak currency makes imported goods expensive. Therefore, consumers buy domestic goods, thus stimulating the domestic economy. In both cases, a floating currency tends to be volatile.

In a nutshell :

  • A floating exchange rate is one that is determined by supply and demand on the open market.
  •  A floating exchange rate doesn't mean countries don't try to intervene and manipulate their currency's price
  • since governments and central banks regularly attempt to keep their currency price favorable for international trade.
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