Forex Blog | Floating Exchange Rate?

Forex Blog | Floating Exchange Rate?

In this Forex Blog post, we will be discussing the definition and the real life comparison of the “Floating Exchange Rate.” The Floating Exchange Rate is a widely used term, so it is great for new traders to learn what it is. We will outline the definition in detail in this Forex Blog exclusive article.

A Floating Exchange Rate is not some crazy mathematical number. When we talk about trading in all of our Forex Blog posts, we talk about the pairing and trading of two currencies. What the Floating Exchange Rate is, is when the exchange rate gets pushed and pulled by supply and demand without any outside intervention. Because of this, the exchange rate can move freely to find it’s equilibrium. This has both good and bad aspects of it, and we will briefly go into examples of both.

One of the greatest aspects of a Floating Exchange Rate is that it more or less “self corrects” itself to find the perfect balance of supply and demand. Because the exchange rate moves freely, it is not affected (usually) by 3rd parties.

The bad side to a Floating Exchange Rate comes when talking about big investment firms betting either for or against a certain currency. Let’s say that one huge investment firms feels that within a year, government XYZ is going to collapse into anarchy. People will be riding dolphins trying to escape the country, and those left will be roundhouse kicking everyone for the last scrap of food. The currency being used by XYZ is currency X. Mr. Investment firms believes in this collapse so much that they are shorting huge amounts of currency X. Because it is a Floating Exchange Rate, this will negatively affect the currency. And even though that a Floating Exchange Rate is supposed to freely float to correct itself, government XYZ needs to step in. The cut a potential train wreck, the government starts buying X currency. This offsets the huge amount of shorting, and just like that the currency is saved. However, without the government intervention, the Floating Exchange Rate would have proved disastrous for country XYZ.

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