Using Currency Exchange Rates For Gain Or Profit.
A floating exchange rate is a type of exchange rate system where a currency's value is allowed to fluctuate according to the foreign exchange market. A currency that uses a floating exchange rate is known as a floating currency. The opposite of a floating exchange rate is a fixed exchange rate.
Most economists say, in most circumstances, a floating exchange rate is preferable to a fixed exchange rate. This allows the dampening of shocks and foreign business cycles. However, in certain situations, fixed exchange rates may be preferable for their greater stability and certainty. This is not necessarily true, considering the results of countries that attempt to keep the prices of their currency "strong" or "high" relative to others, such as China.
Thus, the exchange rate regimes of floating currencies may more technically be known as a managed float. A central bank might, for instance, allow a currency price to float freely between an upper and lower limits, ie: a price "ceiling" and "floor". Management by the central bank may take the form of buying or selling large lots in order to provide price support or resistance.
A fixed exchange rate, or a pegged exchange rate, is a type of exchange rate system where a currency's value is matched to the value of another single currency or to a group of other currencies. As the reference value rises and falls, so does the currency pegged to it. In addition, fixed exchange rates deprive governments of the use of an independent domestic monetary policy to achieve internal stability.
In certain situations, fixed exchange rates may be preferable for their greater stability. For example, the Asian financial crisis was improved by the fixed exchange rate of the Chinese renminbi, and the IMF and the World Bank now acknowledge that Malaysia's adoption of a peg to the US dollar in the aftermath of the same crisis was highly successful. Yet others argue that, the fixed exchange rates had become so immovable that it had masked valuable information needed for a market to function properly. That is, the currencies did not represent their true market value. Countries that adopt a fixed exchange rate should exercise a careful and strict adherence to policy imperatives, and keep a degree of confidence of the capital markets in the management of such a regime, or otherwise the peg can fail. Also thus China's fixed exchange rate with the US dollar until 2005 led to China's rapid accumulation of foreign reserves, placing an appreciating pressure on the Chinese yuan, to the anguish of the US government.
The foreign exchange (currency or forex) markets exist wherever one currency is traded for another. It is by far the largest financial market in the world, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. The average trade in the global forex and related markets currently is over US$ 3 trillion per Day.
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