Home > Business > Floating versus fixed exchange rates

Floating versus fixed exchange rates

The international currency exchange rates normally display the amount of unit of the currency which can be exchanged for the other currency. The currency exchange rate might be floating, whereby they tend to change continually based on various influences or they might be fixed or pegged to each other, in which instance, they will continue to drift, but they keep moving in tandem to the currency that they are attached on.

To know the value of a home currency in relation to the various foreign currencies helps the investors in analyzing assets which are priced in foreign dollars. An example is where on the exness, a USA investor knowing that the dollar to the euro exchange rate tends to be valuable when they are selecting European investments.

A USA declining dollar might increase the value of the foreign investment just as a USA dollar which is increasing in value could end up hurting the value of your foreign investment.

Fixed vs floating exchange rates

The currency prices can be determined in two ways; fixed or floating rate with a floating rate being determined via the open market through the demand and the supply on a global currency market. Thus, if the demand for the currency tends to be high, the value is likely going to increase. In case the demand becomes low, it will drive the currency price to be lower.

There are several fundamental and technical factors that will determine what people perceive to be exchange rate which is fair, altering their demand and supply accordingly. The currencies of majority of the world economies which are known to be major were allowed to freely flow after the Bretton Woods system collapsed between the 1968 and the 1973. Thus, majority of the exchange rates aren’t set but are determined by the trading activities which are ongoing in the currency market of the world.

Factors influencing the exchange rates

The floating rates are normally determined by the forces on the market of the demand and supply. The amount of demand there happens to be in relation to the currency supply will be what will determine the currency value in relation to another currency. An example is where the demand for the US dollar by those in Europe goes up, the supply and demand relationship will make an increase to be witnessed in the US dollar as compared to the Euro.

There are various economic and geopolitical announcements which might end up affecting the exchange rates that exists between two countries, but a few of the ones which tend to be common include the unemployment rates, the interest rate changes, the inflation reports, the manufacturing data, the gross domestic product numbers and the commodities.

A pegged or fixed rate is normally determined by the government via the central bank. The rate is then set against another world currency which is major like Euro, USD, or yen. To be able to maintain the exchange rate, the government will go ahead and sell and buy its own currency against the currency which it decides to peg itself on.