currency float

Floating currency is defined as the currency associated with a floating exchange rate.[1] It is the system through which the value of the currency exchange is determined only through the interaction between supply and demand between market forces without the need for government intervention, which in turn is determined by the integrity of the basic economic situation in the country, but all banks try to defend these rates within a certain range, by Buying or selling a country’s currency according to its economic situation.[2]

Factors affecting currency floatation

Floating exchange rate systems are based on many influences that can change the exchange rates according to the conditions of the country, the most important of which are:[3]

  • Long-term changes in currency rates, which reflect a country’s economic strength, and interest rate differentials between countries.
  • Short-term changes in floating exchange rates reflect speculation, rumors, and catastrophes, as well as the daily supply and demand for the currency.
  • If demand exceeds supply, the currency will rise and vice versa.
  • In the short term, extreme changes can lead to central banks and governments getting involved, especially if a country’s currency becomes too high or too low.
  • Too high or too low a currency can affect the national economy negatively, affecting trade movements, and the ability to repay debts.

Cons of currency float

Floating currency systems negatively affect the country, and the most important of these effects are:[4]

Doubt and uncertainty

The currency float system is based on a lot of fluctuations, which change the value of currencies continuously, and since the foreign exchange market is not regulated, the values ​​of currencies may rise or fall sharply within minutes, and therefore investors do not risk entering into foreign trade because they are not aware of the exact prices. that their goods will bring, as these currency fluctuations can cause a significant drop in corporate profits.[4]

resource distribution

The country’s economy faces many problems resulting from the distribution of resources, as fluctuations in exchange rates may not enable it to create and stick to a long-term strategy regarding exports and imports. High exchange rates make imports the best option, while lower prices make exports the best option. This negatively affects the overall economy in the country.[4]

lack of discipline

Monetary policies can be abused for personal gain by a group of influential people in the country, so the country must have adequate internal control mechanisms over currency rates, impose fiscal discipline on the economy, or link fiscal policy with another, more developed currency as well. Some third world countries do, as they link their monetary policy to strong currencies; Like the dollar, or the euro.[4]

the reviewer

  1. ↑ “floating currency”, www.businessdictionary.com, Retrieved 5-12-2019. Edited.
  2. ↑ “floating exchange rate”, www.businessdictionary.com, Retrieved 5-12-2019. Edited.
  3. ↑ CORY MITCHELL (9-4-2019), “Floating Exchange Rate”, www.investopedia.com, Retrieved 5-12-2019. Edited.
  4. ^ a b c Prachi Juneja, “Advantages and Disadvantages of Freely Floating Exchange Rates”, www.managementstudyguide.com, Retrieved 5-12-2019. Edited.

What is the concept of currency float

Writing – on the date : – Last updated: 2022-05-19 11:54:01