Floating Exchange Rate
An exchange rate determined freely by market supply and demand, without a government-set target.
What is Floating Exchange Rate?
A floating exchange rate is a currency regime in which a currency's value is determined primarily by supply and demand in the foreign exchange market, without a government or central bank maintaining a specific target level. Most major economies — including the United States, eurozone, United Kingdom, and Japan — operate floating exchange rates. Even in a pure float, central banks may occasionally intervene to address disorderly market conditions or extreme volatility (making it a "managed float" in practice). Floating rates allow monetary policy to respond to domestic economic conditions and automatically adjust to external shocks through currency appreciation or depreciation.
Example
The US dollar has operated under a floating exchange rate system since 1973, following the collapse of the Bretton Woods fixed-rate system. Between 2021 and 2022, the dollar index (DXY) appreciated approximately 15% as the Federal Reserve raised rates aggressively, illustrating how interest rate differentials drive demand for a floating currency.