Advantages Of Floating Exchange Rate

Register to read the introduction… A fixed rate is a rate the government or in most cases the central bank sets and maintains as the official exchange rate. A set price will be determined against a major world currency. The most common currency countries usually fix to is the U.S. dollar. The local exchange rate is maintain by the central bank buys and sells its own currency on the foreign exchange market in return for the currency to which it is pegged. According to Xu unlike the fixed rate, a floating exchange rate is determined by the private market through supply and demand. A floating rate is often coined "self-correcting," as any differences in supply and demand will automatically be corrected in the market. Look at this simplified model: if demand for a currency is low, its value will decrease, thus making imported goods more expensive and stimulating demand for local goods and services. This in turn will generate more jobs, causing an auto-correction in the market. A floating exchange rate is constantly changing. In reality, no currency is wholly fixed or floating. In a fixed regime, market pressures can also influence changes in the exchange …show more content…
However, it is less often that the central bank of a floating regime will interfere. Frankel (2006) states that the floating exchange rate is most often used for the unofficial increase of the exchange rate due to market forces, though sometimes it appears interchangeably with devaluation. Its opposite, an increase of value of a currency, is currency appreciation. Appreciation deals with the two- way relationship of two currencies within the exchange rate system. When dealing with currency there is a give and take relationship. Appreciation brings increased value to a currency but as one country’s currency’s value increases another currency’s value is decreasing in comparison. This loss of value of a country's currency with respect to one or more foreign reference currencies is the antonym of appreciation and it is called depreciation. This is typical of the relationship in a floating exchange rate