Floating Exchange Rates Definition

 

A floating exchange rate occurs when governments allow the exchange rate to be determined by market forces and there is no attempt to influence the exchange rate.

In recent years, several countries have pursued inflation targets as the primary goal of monetary policy. Therefore, by targeting inflation, they have given less importance to the exchange rate and more countries have allowed their exchange rate to float freely.

Dirty Floating

Sometimes, countries are not in an official exchange rate mechanism, but they still do pay attention to the value of the exchange rate. Though they have no published target for the exchange rate, they may intervene under certain circumstances. For example, if the exchange rate deteriorated rapidly, they may increase interest rates to keep the value stronger.

For example, in the late 1980s, the UK had a policy of ‘shadowing D-Mark’ as precursor to joining the ERM.

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