Floating Exchange Rate – The pros and cons

Find out what the floating exchange rate is and why some countries use it. What are the benefits? What are the risks? and much more

Floating Exchange Rate! What does floating currency mean?

To float a currency is to make the exchange rate of this currency totally liberalized.. so that the government or the central bank does not interfere in setting it directly. It is automatically emptied into the currency market through a supply.. and demand mechanism that permits setting the national currency’s exchange rate against foreign currencies.

Floating currency exchange rates oscillate constantly with every change in the supply.. and demand of foreign currencies so that they can change even many times per day.

The supply and demand for a currency are affected by several factors, including but not limited to: 

World trade

Interest rates

Foreign and international investment

Any or all of these factors will have an important effect on the value of a currency in the international forex market. 

A floating currency price can be left to be determined only by market supply.. and demand and it can be limited. When a floating exchange rate is limited, the government interferes as needed in order to direct the exchange rates when they become too high or too low by affecting the volume of the supply or demand for foreign currencies. Read more .

Which is better: fixed or floating exchange rate?

Perhaps we can predict that both come with advantages and disadvantages, and selecting which is better depends largely on the individual financial and economic situation of a country.

How does a floating exchange rate work?

More than $5 trillion is traded in the forex markets regularly, which is a huge amount by any measure. All this amount is exchanged through the various rates of different currencies, which is the price at which one currency can be exchanged for another. 

This means buying and selling one currency for another at exact prices. This can occur as a form of investment or as in some cases in our daily life when you are trying to earn money for your next vacation or to move abroad.

The power of supply and demand and factors such as the economic and financial health of a country determine the value of its currency, whether it is increasing or decreasing. Higher demand = higher value, while lower demand = lower value.

Using a floating currency is considered a financial benefit when the economy is strong and fiscal policy is sound.

Pros of a floating exchange rate:

    Balance of Payments (BOP):

 BOP plays a major role in the local currency exchange rate. It refers to a statement of the transactions between one country and the rest of the world through an identified period of time.

    Specific exchange rates from the market:

Floating currencies are allowed to be traded in the currency markets without management from central banks and governments throughout these operations.

        High market efficiency:

 When currencies are based on a floating exchange, they tend to make investments between countries more easy and attractive, and they can boost a country’s overall economy and domestic production.

    Does not require large foreign currency reserves:

When using the floating exchange rate, central banks do not need to hold large numbers of foreign exchange reserves to balance the exchange rate. Reserves used to stimulate economic development by purchasing capital goods.

Protection from import inflation: The problem of import inflation can result from a balance of payments surplus or increasing costs of imports by countries with firm exchange rates. 

Risks of a floating exchange rate:

    Risk of volatility:

Floating currencies are controlled by fluctuations and are not predictable by default. One currency can decrease in value against another currency within a single trading day. In addition, short-term fluctuations cannot be explained by the basic principles of macroeconomics in a currency with a floating exchange rate.

    Limited economic growth and recovery:

The lack of firm control over the currency exchange rate places restrictions on the expansion and recovery of the economy in some cases. 

When the currency depreciates, it can cause serious problems, such as export and import within certain countries. If the value of the euro depreciates against the US dollar, it will be hard to import goods and products from the UAS.

A list of 11 important points to consider when deciding to start trading fiat currencies with your broker:

    Different types of trading accounts:

a good broker should offer you various kinds of accounts with a lot of advantages for specific kinds of trading, such as those with top protection, bigger leverage, lower spreads, or other options of financial tools.

    Spreads:

When advertising the low spread on the site does not mean that you will continue to receive it later.

Looking for a competitive broker by focusing on low spreads offers is not necessarily the finest idea, as the average spread offered does not guarantee that it uses a specific kind of trade as well.

    Optional Leverage:

Forex is a market that is traded with leverage. To manage your trading position and account, it is very important that you are aware of the principle of leverage.

    Quality of order execution and slippage:

Having low spreads and the best order execution policy in your hand are some of the advantages that you should consider.

    Allow various trading styles:

If you are searching for high-frequency daily trading, make sure there are various trading styles allowed. The scalping brokers do not have a minimum amount of time to wait between the market price, stop loss and take profit.

    Trading platform:

The trading platform you feel comfortable with and that fits your individual needs is important. 

    Dedicated trading tools and plugins:

 Good brokers should give valuable support to their traders. 

    Forex broker license:

 It is basic to open an account with a regulated and licensed broker.

    Security of funds:

 Select a forex broker with bank accounts in Europe, especially, who has different bank accounts.

    Customer service:

Owning a dedicated Forex broker to its clients, with several channels and languages to enhance their trading experience.

    Education:

 Forex brokers offer training and educational courses. For beginners in Forex trading, it is basic to understand trading terminology, so a broker with proper training instruments is always the best choice.

About Marketsbloom:

Markets Bloom is a trading academy consisting of former trading industry professionals. Our aim is to help all types of traders looking to trade in the financial markets.

By registering with us, you will gain amazing insights into common issues traders face as well as how to instantly improve your trading approach. Our team of experts will be with you every step of the way on your journey to becoming a better trader.

For more information on our services contact us