People who do business internationally should be aware of exchange rates and how they work exactly. Let’s try to understand about floating currency exchange rate and fixed currency exchange rate.
Floating currency exchange rate depends on demand and supply. If demand for currency is high then value increases and if demand for currency is low then value decreases. This exchange rate affects a country’s trade position internationally.
Advantages of the floating currency exchange rate are as follows −
Disadvantages of the floating currency exchange rate are as follows −
Fixed currency exchange rates are maintained by the central bank and these are also called pegged rates. These are found mainly in the Middle East and Africa. Central bank links domestic currency to another country’s currency and makes sure the rate will not change.
Most countries peg their currency to US $, some may peg to EURO etc. central intervene and keep foreign reserves at high level. These rates are used to adjust market fluctuations. Release or absorption of funds in or out is powered by the central bank. Maintaining a certain level of foreign reserves is important in managing.
Advantages of the fixed currency exchange rate are as follows −
Disadvantages of the fixed currency exchange rate are as follows −