exchange rate system in which rates of each national currency are determined by interaction of market supply and demand. Factors affecting demand and supply of each currency include a country's current account balance, the general strength of its economy, its rate of inflation, and interest rates as compared against other nations.
In the years since 1971 when the United States finally abandoned the fixed exchange rate system and convertibility of the dollar into gold, most world currencies have traded at floating, or flexible, exchange rates. A downside to the floating exchange rate system is that central banks have to intervene in the markets from time to time, by buying or selling currencies to keep exchange rates from getting too high or too low. clean float currency has a minimum of official intervention, except to maintain market stability, and its exchange rate is mostly determined by market demand. dirty float, on the other hand, denotes a varying amount of official intervention to keep a nation's currency within a desired range of currency prices in relation to other currencies.
movement of a foreign currency exchange rate in response to changes in the market forces of supply and demand; also known as flexible exchange rate. Currencies strengthen or weaken based on a nation's reserves of hard currency and gold, its international trade balance, its rate of inflation and interest rates, and the general strength of its economy. Nations generally do not want their currency to be too strong, because this makes the country's goods too expensive for foreigners to buy. A weak currency, on the other hand, may signify economic instability if it has been caused by high inflation or a weak economy. The opposite of the floating exchange rate is the fixed exchange rate system.
