Floating exchange rate

A floating exchange rate is the price of one currency in terms of another, determined primarily by supply and demand in currency markets.

Foreign exchange market: A global, decentralized market where participants trade national currencies. Its supply and demand establish floating exchange rates.
Fixed exchange rate: An exchange rate maintained at a target value against another currency or reference. It replaces market-led adjustment with a commitment to defend a rate.
Exchange-rate pass-through: The extent to which exchange-rate changes alter prices of imported or exported goods. It links currency movements to domestic prices and inflation.
Bretton Woods system: A postwar international monetary system of fixed but adjustable exchange rates centered on the US dollar and gold. Its breakdown opened the way to widespread floating exchange rates.
Marshall–Lerner condition: A condition under which currency depreciation improves a country’s trade balance when export and import demand elasticities are sufficiently large. It qualifies the assumption that depreciation automatically improves trade.
Exchange rate: The price of one currency expressed in units of another currency. A floating exchange rate is one way this broader price is determined.
Pegged exchange rate: An exchange rate held within a set value or range relative to another currency or basket. A peg constrains fluctuations that a float permits.
Purchasing power parity: A theory that exchange rates adjust toward equalizing the prices of comparable goods across countries. It offers a benchmark for judging whether floating rates diverge from price levels.
Nixon shock: The 1971 US policy shift that ended dollar convertibility into gold for foreign governments. It destabilized the monetary arrangements that had anchored fixed rates.
J-curve effect: The pattern in which a depreciation initially worsens, then improves, a trade balance over time. It captures the delayed response of trade volumes to floating-rate movements.

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