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Floating Exchange Rate System

Due to the increasing international trade, the fluctuations involving the values of currencies around the world have also grown significantly. Thus the countries follow various types of the exchange rate in the market in order to deal with its currency regarding a foreign currency trading.

These rules are connected to the monetary policy of the country. These rules are beneficial for developing countries as they can prevent significant changes in their currency rate.

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Floating Exchange Rate

It is also called as Fluctuating exchange rate and the currency that uses this sort of rule is known as a floating currency. The countries that follow this type of rule allow their currency to fluctuate in accordance with the currency market.

This is usually used by the developing countries as it's not possible to allow them to maintain a fixed exchange rate of their currency in the world foreign exchange market.

Fixed floating exchange rates

This system is an addition of the managed floating exchange rate system.  It is of two types:

  1. Crawling Pegs – In this central bank allows you to decide the fixed value of the currency.

  2. Crawling Bands: In this system, the central bank sets the limits for the currency fluctuations. The central bank interferes in case currency rates set by the traders goes above the limit.