Floating exchange rate
Also called: Flexible exchange rate · Topic: The Making of a Global World · NCERT: Class 10, Ch 3 "The Making of a Global World"
Meaning
Under a floating (or flexible) exchange rate, the value of a currency is set by supply and demand in foreign exchange markets. When many people want a currency, its value rises. When few want it, its value falls. In principle there is no fixed official rate, though governments sometimes step in to calm sharp swings. Floating rates became common after the Bretton Woods system broke down. This marked the start of the era of "globalisation".
Example
From the 1960s, the US dollar could no longer hold its fixed value of $35 per ounce of gold. In the early 1970s, the fixed rates of the Bretton Woods system collapsed, and major currencies began to float. In the same period, developing countries had to borrow from Western commercial banks. This led to repeated debt crises, especially in Africa and Latin America.
Don't confuse with
- Fixed exchange rate: Here governments hold the value of their currency at a set level, as the rupee was pegged to the dollar under Bretton Woods.
Related concepts
- Bretton Woods Conference
- Bretton Woods system
- International Monetary Fund
- World Bank
- Fixed exchange rate
- Marshall Plan
- General Agreement on Tariffs and Trade
- Multinational corporation
- Group of 77
- New International Economic Order