No fixed peg, no state decree:supply and demand set the rate you see.
An exchange rate that is determined by supply and demand in the open market rather than being fixed or pegged by a government.
Most major currencies operate under a floating exchange rate system.
In plain words
A floating exchange rate is one that the market sets. The price of the currency moves continuously as buyers and sellers trade it, and there is no official level that the government or central bank promises to hold. The alternative is a fixed or pegged rate, where the authorities commit to keeping the currency at or near a set value.
See it move
Buyers outweighs Sellers
Why it matters
The pairs most people trade are floating, which is why their prices move all the time. Floating does not mean untouched: central banks sometimes intervene by buying or selling their own currency, an arrangement often called a managed float.
Worked example
An example only. The figures are round and invented for the arithmetic: they are not market prices.
In an invented session importers want to buy 500 million of a currency at the current price, while exporters want to sell only 300 million.
- 1Demand at this price500 million
- 2Supply at this price300 million
- 3Shortfall = 500 − 300 = 200 million, so buyers have to bid higher
The price of the currency rises until enough sellers come forward, with no authority setting the level.
A common mistake
Floating is sometimes taken to mean that a central bank never acts in the market. Authorities with floating currencies can and occasionally do intervene; what they do not do is promise a fixed rate.
Check yourself
Educational information, not investment advice or a recommendation to trade.