floating


Written By: Ehsan Jahandarpour

A floating exchange rate or fluctuating exchange rate is a type of exchange-rate regime in which a currency’s value is allowed to fluctuate in response to market mechanisms of the foreign-exchange market. A currency that uses a floating exchange rate is known as a floating currency. A floating currency is contrasted with a fixed currency. In the modern world, most of the world’s currencies are floating; such currencies include the most widely traded currencies: the United States dollar, the euro, the Norwegian krone, the Japanese yen, the British pound, and the Australian dollar. From September 2011 until January 2015, the Swiss franc, which had formerly traded via a floating exchange rate, had its floor pegged to the euro. However, central banks often participate in the markets to attempt to influence the value of floating exchange rates. The Canadian dollar most closely resembles a “pure” floating currency, because the Canadian central bank has not interfered with its price since it officially stopped doing so in 1998. The US dollar runs a close second, with very little change in its foreign reserves; in contrast, Japan and the UK intervene to a greater extent. From 1946 to the early 1970s, the Bretton Woods system made fixed currencies the norm; however, in 1971, the US decided no longer to uphold the dollar exchange at 1/35th of an ounce of gold, so that the currency was no longer fixed. After the 1973 Smithsonian Agreement, most of the world’s currencies followed suit. However, some countries, such as most of the Gulf States, fixed their currency to the value of another currency, which has been more recently associated with slower rates of growth. When a currency floats, targets other than the exchange rate itself are used to administer monetary policy (see open-market operations).