Difference between Fixed and Floating Exchange Rate

Exchange rate in currency market refers to that rate at which the currency of the country can be bought and sold by various parties like importers, exporters, banks, individuals and so on. Exchange rate are of two types that is fixed and floating exchange, given below are the differences between the fixed and floating exchange rates –

  1. Under fixed exchange rate system the exchange rate of the currency remains fixed whereas under floating exchange rate system the exchange rate of the currency keeps fluctuating.
  2. Fixed exchange rate system requires constant intervention from the government so that currency does not fluctuate and the exchange rate remains fixed whereas under floating exchange rate system there is no or minimal intervention from the government and there is free movement of the exchange rate.
  3. Under fixed exchange rate government needs to have enough foreign exchange reserves so that it can sell those foreign exchange reserves for local currency and save the local currency from deprecating against foreign currency whereas under floating exchange rate government does not require substantial amount of foreign exchange as currency exchange rate is determined by demand and supply and therefore no need to buy or sell foreign exchange reserves.
  4. Fixed exchange rate does not truly reflect the correct value of the currency against other currencies because of constant government intervention while floating exchange rate reflects true value of currency because when market are allowed to function freely they discover the true value by taking into account the demand and supply of the asset class (in this case it is currency). Hence if a country is growing quickly then its currency will appreciate against other currencies and if country economy is facing a downturn then its currency will depreciate against other currencies.

As one can see from the above that there are many differences between fixed and floating exchange rate, however in real life majority of the countries use of mix of both system because if currencies are completely left to markets then it can lead to problem if there is too much speculation on currency and therefore government intervention is necessary to keep speculation in check.

0 comments… add one

Leave a Comment


Related pages


concept of capmfees earned but unbilledtypes of financial guaranteescrr full formpenetration pricing strategy pdfdisadvantages of exportingdisadvantages of convertible bondsdisadvantages of m&ademerits of decentralisationdifference between tariffs and quotasdisadvantages of a monopolybhel company in indiamerits and demerits of modernizationdifference between bank rate and msfadvantages and disadvantages of deforestationwhat is the difference between systematic risk and unsystematic riskpros and cons of autocratic leadershipinelastic products examplesfmcg fullformlet's learn punjabimoney market hedge advantages disadvantagesunitary elastic demand curvepros and cons of mixed economic systemunitarily elasticlaw of diminishing returns exampleexample of a conglomerate mergerskimming pricing strategiescomparison between socialism and capitalismadvantages of jitcapitalist economy vs socialist economyfull form of tallyadvantages of swot analysisunearned revenue balance sheetjournal entry for salary paid to employeesnon durable good definitionexamples of veblen goodsa study of non operating expenses of proprietary concernglobalization meritswhat is convention of materialitydisadvantages of monopolistic competition market structurefictitious assets definitionwho is the founder of icici bankloan vs overdraftterm loan and overdraftadvantages and disadvantages of job productionjournal entry of prepaid expensesjournal entry for prepaid rentdisadvantages of advertisementcreditors journal entrydefine durable goodadvantages and disadvantages of advertisement on televisiondifference between demat and trading accounttypes of demographic segmentationlaw of diminishing marginal utility examplesagro based industry definitionskimming penetrationwhat is leverage ratiosideal cibil scorecapitalism socialism mixed economytrial balance meaningunqualified audit report examplecomplements in economics examplesfreight means in hindiadvantages of specialization in economicsunitary elastic demand exampleconglomerate diversification meaningtypes of elasticity of demand in economicswhat is draft chequewhat is the difference between tariffs and quotasscheduled commercial banks meaningrevaluation entriespenetration pricing examples