What is meant by currency float? What are its advantages and disadvantages?
What is meant by currency float? What are its advantages and disadvantages?
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\nThe floating currency is intended to leave the value of a country's currency to supply and demand when compared to another currency. There are millions of traders around the world buying and selling currencies, which helps determine their value for others. The floating exchange rate is determined by these daily interactions between traders. If investors By buying the US dollar heavily, it is likely that its value will rise against other currencies, and this means that more dollars will be needed to purchase the same number of goods from abroad.\nThe writer, Mohamed Abdel-Khalek, is an economic analyst
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\nHow does the currency float system work?
\nThe basis of the currency floating system is supply and demand. If the supply is greater than the demand, the value of the currency will decrease. On the contrary, if the demand is greater than the supply, its value will increase.
In the short term, the float can be affected by factors such as speculation, natural disasters, and political news, for example: elections can often lead to periods of negative sentiment if an extremist party has a chance to grab power.
\nAs for the long term, the floating exchange rate in the foreign exchange trading market tends to fluctuate based on the economic performance of the country and its trade balance, if the economy is performing poorly it tends to see less investment from abroad, this means that less demand is made for the currency and thus exerting negative pressure on its worth.
\nThe trade balance is the net of what a country exports and imports, so if a country imports more than it exports it has a net flow of its currency, this is because it demands more goods from other countries than those countries demand from them domestically, in return, the country sends more of its currency to abroad, thus increasing the market supply and decreasing its value.
\nTheoretically, a flotation mechanism can help countries recover from recession. This is because their currency tends to weaken as a result of poor economic performance. In turn, exports become more competitive because they are cheaper in the international market. This can help provide a boost to local exporters. At the same time, imports become more expensive. This may make goods more expensive in the short term but has the potential to boost alternative domestic suppliers who become relatively cheaper.
\nAdvantages of floating exchange rate
\n1. Stability in the trade balance
\nThe trade balance is the difference between what a country imports and what it exports. It may also be known as "net imports". This is an important economic aspect because it is a component of a country's economic output.
\nA floating exchange rate allows for more stability in this region as the currency is volatile. When a currency depreciates it means that exports become cheaper to the rest of the world. This provides a boost to the balance of trade between countries as they can export more because they are relatively cheaper than their competitors.