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Economics explained


Exchange rates

Floating exchange rate Cons

Floating exchange rate Cons

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Uncertainty for traders and investors.

The exchange rate may fluctuate significantly.Changes in the exchange rate may make it difficult to estimate how much will be earned by selling exports and how much will have to be paid for imports. The uncertainty caused by currency fluctuations can discourage international trade and investment.

A floating rate may remove pressure on the government to maintain price stability.

A government may rely on a fall in a floating exchange rate to restore any loss in international competitiveness arising from inflation. There is a risk, however, that a fall in the exchange rate will increase inflationary pressure.

There is also no guarantee that a floating exchange rate will eliminate a current account surplus or deficit.

For instance, the value of an exchange rate may be pushed up despite the country having a current account deficit if speculators are buying the currency expecting it to rise in value

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