Floating exchange rate - Definition and Overview

A floating exchange rate is a type of exchange rate regime wherein a currency's value is allowed to fluctuate according to the foreign exchange market. A currency that uses a floating exchange rate is known as a floating currency. The opposite of a floating exchange rate is a fixed exchange rate.

Economists generally think that, in most circumstances, floating exchange rates are preferable to fixed exchange rates because floating rates are responsive to the foreign exchange market. However, in certain situations, fixed exchange rates may be preferable for their greater stability.

There is no currency in the world for which its value is absolutely determined by the foreign exchange market; in cases of extreme appreciation or depreciation, the central bank will intervene to stabilize the currency. Thus, the exchange rate regimes of floating currencies may more technically be known as a managed float.