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Economics explained


Exchange rates

Floating exchange rate system

Floating exchange rate system

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Floating exchange rates are exchange rates that are allowed to fluctuate according to demand and supply conditions in the foreign exchange markets.

A genuine free float would involve leaving exchange rates entirely to the vagaries of supply and demand on the foreign exchange markets, and neither intervening on the market using official reserves of foreign exchange nor taking exchange rates into account when making interest rate decisions.


A rise in the value of the currency caused by... increase in demand...
...a decrease in supply...

is known as an appreciation.


A fall in the value of a currency caused by...

...a fall in demand...
...a decrease in supply...

is known as depreciation.

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