Welcome to the Investors Trading Academy talking
glossary of financial terms and events. Our word of the day is FLOATING EXCHANGE RATE.
It is the currency exchange rate without the influence of the government, but the natural
performance of the market. Some countries with floating exchange rates include the US,
Canada, England, and the Eurozone. China on the other hand, does not have a floating exchange
rate, but is instead pegged to a basket of currencies.
A country’s exchange rate regime where its currency is set by the foreign-exchange market
through supply and demand for that particular currency relative to other currencies. Thus,
floating exchange rates change freely and are determined by trading in the forex market.
In some instances, if a currency value moves in any one direction at a rapid and sustained
rate, central banks intervene by buying and selling its own currency reserves (i.e. Federal
Reserve in the U.S.) in the foreign-exchange market in order to stabilize the local currency.
However, central banks are reluctant to intervene, unless absolutely necessary, in a floating