Floating Currency

A floating currency is a currency that uses a floating exchange rate as its exchange rate regime. A floating currency is contrasted with a fixed currency.


In the modern world, the majority of the world's currencies are floating. Central banks often participate in the markets to attempt to influence exchange rates, but such interventions are becoming less effective and less important as the markets have become larger and less naive. Such currencies include the most widely traded currencies: the United States dollar, the euro, the Japanese yen, the British pound, the Swiss franc  and the Australian dollar. The Canadian dollar most closely resembles the ideal floating currency as the Canadian central bank has not interfered with its price since it officially stopped doing so in 1998. The US dollar runs a close second with very little changes in its foreign reserves; by contrast, Japan and the UK intervene to a greater extent. From 1946 to the early 1970s, the Bretton Woods system made fixed currencies the norm; however, in 1971, the United States government abandoned the gold standard, so that the US dollar was no longer a fixed currency, and most of the world's currencies followed suit.


A floating currency is one where targets other than the exchange rate itself are used to administer monetary policy. See open market operations.

The People's Republic of China recently unpegged their currency, which was formerly pegged to the US dollar, and allowed it to float within a carefully managed range of values relative to the dollar and other currencies.