How do floating exchange rates work?
Floating exchange rates work through an open market system in which the price is driven by speculation and the forces of supply and demand. Under this system, increased supply but lower demand means that the price of a currency pair will fall; while increased demand and lower supply means that the price will rise.
Floating currencies are perceived as strong or weak depending on the market sentiment towards their country’s economy. For example, if a government is viewed as unstable, the currency is likely to depreciate as faith in their ability to regulate the economy declines.
However, governments can intervene in a floating exchange rate to keep their currency’s price at a favourable level for international trade – this also helps to avoid manipulation by other governments.
Learn more about what moves the forex market