Fixed Versus Floating Exchange Rate

People are always asking what's the difference in these:

Fixed Versus Floating Exchange Rate

An exchange rate is the price at which trades the currency of one country to another in the forex market, there are 2 exchange rate regimes – the floating exchange rate and the exchange rate fixed.

Floating exchange rate

The floating exchange rate is market-driven prices of currencies in which the exchange rate is entirely determined by free market forces of supply and demand of foreign exchange without government intervention whatsoever.

In general, the floating exchange rate system is composed of independent floating and managed floating. The first is when the exchange rate is strictly determined by the free movement of demand and supply. To manage a system floating exchange rate is also determined by the free movement of demand and supply, but the monetary authorities intervene at certain times to "manage" the exchange rate to avoid high volatility.

Pros and cons of floating exchange rate

The floating exchange rate has several merits. First, the correction is automatic in the floating exchange rate as a country can only move freely in the equilibrium of demand and supply. Second, is the isolation external economic developments, as the country's currency is not linked to the high inflation rate is possibly the world, under a fixed exchange rate. The free movement of demand and supply helps to insulate the economy from the economic fluctuations national. Third, governments are free to choose their domestic politics as a floating exchange rate that enable Automatic imbalance correction in the balance of payments that may arise from the implementation of the policy national.

However, also refers in particular on the exchange rate is unstable and uncertain in the floating exchange rate. Also, speculation tends to be higher in the floating exchange rate, which creates uncertainty, especially for traders and investors.

Fixed exchange rate

For an exchange rate fixed, the government is not willing to let the currency float freely in the country, and indicate a level where the exchange rate will stay. The government takes all necessary measures to keep pace and avoid the fluctuations. There are two methods that the exchange rate could be applied to the currency rate, a fixed exchange rate and a fixed exchange rate.

As part of the fixed exchange rate, lower exchange rate is rarely called revaluations. Even if growth rates are expected devaluation. Devaluation fixed exchange rate because the current account to rise, makes a country's exports less expensive for foreigners and discourage imports by making imported goods more expensive for domestic consumers. This will lead to a growing surplus of Name or decrease the trade deficit. The opposite occurs when the revaluation

Pros and cons of fixed exchange rate

Despite its rigidity, the fixed exchange rate regime is still used for several reasons. First, there is certainty in the exchange rate fixed. With its international investment trade becomes less risky. Speculation Secondly, there is little or no information on a fixed exchange rate.

However, a rate fixed exchange rate contradicts the objective of free markets and not able to adapt quickly to crises such as the floating exchange rate.

About the Author:
Shu Wei Wong works as a planner/strategist. She writes just about anything that interest her or writes on issues highly related to her field of work, especially on strategy and leadership. Find more of her thoughts at http://360strategyleadership.blogspot.com/

Thank you for explaining the differences between Fixed Versus Floating Exchange Currency Rates

Poornima wrote:Thank you for explaining the differences between Fixed Versus Floating Exchange Currency Rates

Thanks for the info....here is what Poornima link says:


Currency Rates

Currency rates are set by the relative value of one currency in terms of supply and demand for that particular currency and the underlying dynamics are related to movements in international trade and also relate to the perceptions of those who trade in the currency market place. Whereas there is a whole industry emerging around the prediction of movements in currency rates, with a view to profit with the trades going on, there will always be element of chance about what finally determines a currency rate – the probability that a trader will act “randomly” or emotively when conducting a trade.


For the most part, currency rates, since based on the actual relative power positions of one currency as compared to another, tend to be stable over time, or will tend to move for obvious and predictable reasons. For example, it is expected that the currency pair of US Dollar and Australian Dollar will move towards parity perhaps by the end of next year – as a result of relative market strength, or at least the perception of it, for the two countries involved.


In the day to day market, there are peaks and troughs which wholly relate to immediate supply and demand for the currencies involved – something like the waves on the top of the ocean – with long term trends being more like the tides. Generally speaking a strong currency is one where the country issuing the currency holds a strong position in the area of international trade – currency rates will stay firm and eventually appreciate against other currencies where there is a strong demand for the currency of a particular country.


A strong demand for any particular currency is related to that country being active in the export market and also to people wanting not only the products of a country, but to invest in that country’s assets. If an economy is strong enough to maintain relatively high interest rates, as opposed to other countries, then investment capital will be attracted to that country. This creates a high level of demand for the currency so that investment can be made – maintaining a high interest rate will attract foreign investment and keep a currency strong. Currency rates are generally indicative of the relative economic strength of a country but can be subject to fluctuations related to short term situations rather than to long term trends.