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Navigate the complex world of currency management with our comprehensive dictionary of financial terms and definitions.

Floating Exchange Rate

A floating exchange rate regime lets currencies find their level in the foreign exchange market. Contrary to a fixed exchange rate regime, where a currency is pegged to another at a fixed rate, exchange rates in a floating exchange rate regime are determined by the interplay of supply and demand. The current floating exchange rate regime has been in place since the 1970s. Some governments intervene, through their central banks, to manage the value of their currency relative to others in order to avoid losing competitiveness. China’s exchange rate regime, for example, has undergone gradual reform since the move away from a fixed exchange rate in 2005. The renminbi has become more flexible over time but is still carefully managed, and depth and liquidity in the onshore FX market is relatively low compared to other countries with floating exchange rates. Gradually, China is allowing a greater role for market forces within the existing regime, and greater two-way flexibility of the exchange rate.