Floating Currency

The concept of floating currency is just the opposite of fixed rate currency. When any currency accepts floating exchange rates as the regulatory force of the currency conversion rate, it is called floating currency. The private market dominates the floating currency conversion rate. This rate is related to the process of demand and supply.

The floating currency is also termed as self-correcting currency. It has been noticed that whenever there occurs any kind of deviation in the demand and supply of the currency, the market itself adjusts that deviations without any effort of the government or any other organization.

At the same time, it is the central bank’s responsibility to control the value of the national currency. In floating currency role of the central bank is limited but at the same time, if the central bank thinks that the currency is loosing its value and the market is unable to control the currency, the central bank of that country can play its role. The central bank also interferes with the floating regime to check the inflation level. But it happens rarely that the central bank is performing such functions in a floating rate regime.

In today�s modern market many countries introduce their currencies as floating currencies. The favorite currencies, against which major part of the trading activities takes place, cannot be termed as floating currencies in true sense because the national governments play a good role in maintaining the value of their respective currency. Dollar of United States of America, pound sterling of Great Britain, euro and a few more come in the category of these widely traded currencies.

The Canadian dollar can be termed as an ideal floating currency among all other floating currencies of the world. Since 1998, the value of Canadian dollar has been maintained by the demand and supply processes of the market and the central bank of the country has not played any role in maintaining the value of the currency. Apart from some instances, US dollar can also be termed as floating currency. On the other hand, pound sterling or Japanese currency is not a floating currency because national governments of these countries or the central banks of these countries play a major role in framing the monitory policy and also in maintaining value of the national currency.

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Last Updated on : 1st July 2013