Top Ten Management on Floating Exchange Rate: An Overview of How The Foreign Exchange Market Operates

Introduction

The following article contains information on the Floating Exchange Rate and explains what the floating exchange is as well as list several facts associated with the FER. The report also contains comparisons on other rates of exchange countries use in the Foreign Exchange Market, along with some of the benefits and consequences of these exchange rates.

The Idea in a Nutshell

The concept of a floating exchange rate is simple. A floating exchange rate, or fluctuating exchange rate, is one of the types of exchange rate regimesin which a currency’s value is able to fluctuate according to the foreign exchange market. A country’s regime is basically the way the country manages its currency in respect to other currencies and the Foreign Exchange Market.

The Top Ten Things You Need to Know About the Floating Exchange Rate

An exchange rateis best stated simply as ‘the rate at which one currencycan be exchanged for another.’  In other words, the exchange rate is just the value of one country’s currency compared to another country’s currency.

2.            There are generally five types of exchange rate systems. These systems are Floating, Fixed, Pegged-Float, Currency Board, and Dollarization. The two main exchange rate systems used throughout the Foreign Exchange Market are fixed and floating.

3.            Floating exchange rates have become the most common type of exchange rate regime today.  However, since central banks frequently intervene to avoid excessive appreciation or depreciation, these regimes are sometimes referred to as  managed floats(or dirty floats). This sometimes makes the exchange rates less volatile.

4.            A managed float, or dirty float, is the current international financialenvironment where exchange rates  can fluctuate from day to day, but a central banks attempts to influence their country’s’ exchange rates by buyingand sellingcurrency. 

5.            A floating exchange rateis determined by the private market through supply and demand. A floating rate can be described as “self-correcting”, which means that any differences in supply and demand will automatically be corrected in the market.

For Example: Say that the demand for a currency is low, the value will obviously decrease, which will cause imported goods to become more expensive. This will increase the demand for local goods and services. This, in turn, will generate more jobs, causing an auto-correction in the market.

6.            Fixed exchange rates, unlike floating exchange rates, are best described as ‘a rate the government sets and maintains as the official exchange rate.’  It’s not allowed to fluctuate due to changes in the foreign exchange market.

7.            One of the major drawbacks to a floating exchange rate is that speculation tends to be higher than that of a fixed exchange rate, which leads to more uncertainty for traders and investors. There are many concerns that the rate is too unstable and uncertain.

8.            Some financial experts believe that the floating exchange rate is the more appropriate choice to use because it does not interfere with foreign trade.  Some economy experts strongly believe that floating exchange rates are the better choice over fixed exchange rates with the pros outweighing the cons in almost every circumstance.

9.            The floating of dollar exchange rate started in 1971, when there was an attack on the US dollar which made it significantly overvalued against several other currencies.  The US government did not intervene to protect the value of the dollar at the time. There was an attempt to return back to fixed rate system in 1973, but it didn’t have any significant effect, and as other currencies were strongly linked to dollar value, the world exchange rate system gradually shifted from fixed exchange rate to floating exchange rate

10.            Several countries have adopted a floating exchange rate over the years. The dollar, euro, yen, and British poundall float.

The Video Lounge

http://www.youtube.com/watch?v=_DzMea_kRMA

The video shows how China is moving back to a managed floating exchange rate. The video shows a short timeline from 2005 and the changes that China has made in its exchange rate.

My Take

I believe that the floating exchange rate is more beneficial to the foreign market than a fixed exchange rate. Though the floating exchange rate has some drawbacks, such as the volatility and potential lack or stability, I believe that the benefits outweigh the consequences. Floating exchange rates help to stabilize the economy with its ‘auto-correction,’ tendencies in the market. Generally, the floating exchange rate is based more on consumers and their willingness to buy, and less on government regulation.

References

(2009). Fixed and Floating Exchange Rate Systems. Retrieved from http://www.essay-911.com/samples/fixedandfloatingexchange.htm
(18 July 2010). Floating exchange rate. Retrieved from http://en.wikipedia.org/wiki/Floating_exchange_rate
Heakal , Reem .(2010). Currency Exchange: Floating Rate Vs. Fixed Rate. Retrieved from http://www.investopedia.com/articles/03/020603.asp
Wong, Shu Wei . (2009, October 7). Fixed Versus Floating Exchange Rate. Retrieved from http://www.articlesbase.com/finance-articles/fixed-versus-floating-exchange-rate-229803.html

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Contact Info: To contact the author of “Top Ten Management on Floating Exchange Rates,” please email Aimee Ortis at Aimee.Ortis@selu.edu.

Biography

David C. Wyld (dwyld.kwu@gmail.com) is the Robert Maurin Professor of Management at Southeastern Louisiana University in Hammond, Louisiana. He is a management consultant, researcher/writer, and executive educator. His blog, Wyld About Business, can be viewed at http://wyld-business.blogspot.com/. He also serves as the Director of the Reverse Auction Research Center (http://reverseauctionresearch.blogspot.com/), a hub of research and news in the expanding world of competitive bidding. Dr. Wyld also maintains compilations of works he has helped his students to turn into editorially-reviewed publications at the following sites:

Management Concepts (http://toptenmanagement.blogspot.com/)

Book Reviews (http://wyld-about-books.blogspot.com/) and

Travel and International Foods (http://wyld-about-food.blogspot.com/).                

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