“Managed floating exchange rate”

definition

A managed floating exchange rate is a regime that allows an issuing Central Bank to intervene regularly in FX markets to change the direction of the currency’s float to support the stability of its balance of payments in excessively volatile periods. This regime is also known as a “dirty float”.

Until the 1980’s the vast majority of the world currencies were subject to some form of control, but in the 1990s and with the advent of free trade and globalisation, most developed economies gradually removed those checks, letting their currency’s exchange rate fluctuate according to supply and demand.

Free floating regimes, however, present some disadvantages, the most obvious one is the impact of sharp fluctuations in the country’s economy through the trade balance. Currency appreciation increases the prices of the country’s exports, while currency depreciation might pose problems to import first-need products such as energy or food.

Central Banks and governments have a broad range of tools to “manage” the exchange rates; from the subtlest monetary policies to straightforward sales and purchases in currency markets.

In that sense, most of the world’s currencies are “managed” to a certain degree including the most traded ones. Officially, the International Monetary Fund recognises 82 countries – 43% of all countries –  that use a managed floating exchange rate in its 2014 report.