Floating Rate
An exchange rate policy where a currency's value is allowed to be determined by the open market through supply and demand.
Governments or central banks typically do not intervene to maintain a specific value, though they may intervene to smooth out excessive volatility.
Word relationships
- flexible exchange rate: Emphasizes the adaptability rather than the market determination.
- pegged rate: An exchange rate fixed by government policy.
Commonly confused with
- Variable Rate: Variable rate usually refers to interest rates that change over time, not currency exchange rates.
Word family
- float (verb): to rest or move on or near the surface of a liquid without sinking; to allow a currency to fluctuate freely.
Collocations
- managed floating rate
- freely floating rate
- clean floating rate
- dirty floating rate
Example sentences
- "Most major world currencies, such as the US dollar, the Euro, and the Japanese Yen, operate under a floating rate system." Discussing economic systems.
- "A floating rate allows a country's economy to absorb external shocks more easily, as the currency can adjust its value." Analyzing market dynamics.
Memory hook
Think of a boat 'FLOATING' freely on the water, moving wherever the currents take it. A FLOATING RATE currency moves freely with market forces. Free movement
When not to use
Do not use 'floating rate' for a currency whose value is fixed; 'pegged rate' is the opposite.
Fun facts
- A 'dirty float' or 'managed float' is a system where a central bank occasionally intervenes in a floating rate system to prevent excessive volatility.
Related words
Explore more words
Interest rates, Monetary Policy, laissez-faire, volatile, deregulation, discretionary
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