Floating exchange rate
Floating (English " flow" ) is in the banking industry, the name given to a system of floating exchange rates, where the price formation in the currency market is left to the prospective supply and demand. The floating is thus a market economy compliant currency regime.
Prehistory
The Bretton Woods saw since July 22, 1944, the opposite system of fixed exchange rates, which until the early 1970s could provide in the industrialized nations of relative stability. Core of the system was the establishment of bandwidths between which the exchange rates were allowed to fluctuate. These bandwidths consisted of an upper and a lower support point. If one of the two achieved by the current exchange rate, the central bank of the State concerned was obliged to intervene in the foreign exchange market. Was, for example, in Germany, the U.S. dollar at the lower intervention point, had to buy and reverse the German Bundesbank U.S. dollar against payment of DM. Through the purchases of the dollar exchange rate has been strengthened so that a decrease of the course could be prevented under the lower intervention point by the intervention. However, this meant that these banks had to put DM in return by way of money creation is available through the purchase of the Bundesbank, which led to Liquidisierung the money markets. This undesirable inflationary effect was retaliation by the Bundesbank, as increased reserve requirements, again compensated ( " fine-tuning "). Other central banks followed suit.
Species
There are various subtypes of floating exchange rates. Depending on the track which currency regime a state or states, one speaks of the block floating, floating controlled or managed floating.
Block floating
The heterogeneous economic development of the western industrial nations made an adherence to this system of fixed exchange rates impossible, because the central banks had to intervene more frequently. Strong exports in countries such as Germany tended to be suspicious appreciation, countries potentially at risk devaluation with a negative balance of trade as the U.S.. The fixed exchange rates were first loosened on 30 September 1969, at 17-18. December 1971 there has been an agreement on the reorganization of exchange rates by so-called central rates within the Smithsonian Agreement. It was the increase in the bandwidth of ± 1% to ± 2.25 %.
The European Union reduced their area on April 24, 1972 this fluctuation margins to ± 1.125 %. On March 19, 1973, the EU began with the common " block floating " against the U.S. dollar, which integrates the existing fixed exchange rates were replaced in favor of floating exchange rates. Within the EU currencies, it remained at a constant exchange rate (bandwidth of ± 1.125 %; "snake "). This block of currencies had only against the U.S. dollar no fixed bandwidths more. The "snake " but suffered latent under an unstable composition of the block of currencies. The block floating was transferred on 13 March 1979 in the European Monetary System.
Controlled floating
When managed floating exchange rate movements, the central bank influences through active intervention in the foreign exchange market without specifying, however, in advance a range for the exchange rate and to announce or to commit to compliance with such range. Therefore, there is neither explicit nor implicit behavioral characteristics of a central bank that would signal their intervention. Rather, their intervention takes place when she sees economic and / or psychological reasons. Interventions are directed here alone on a damping ( too large ) exchange rate fluctuations.
Managed floating
The so-called managed floating (or floating Dirty, dirty floating ) is an exchange-rate regime in which the exchange rate fluctuates basically free, but the central bank intervenes every now and then to reach their target rate. Unlike fixed exchange rates, the central bank not required to keep a certain rate stable, so it can respond more flexibly. After the Asian crisis, many of the affected countries of fixed ( pegged to the U.S. dollar ) have switched to managed floating currencies. The European Central Bank followed in principle the principle of managed floating, but published no exchange rate target. The end of 2008 they intervened at the dollar market to dampen the strong appreciation of the euro. The euro thus subject to a strategy of managed floating or even the free floating.
Interventions
Among interventions is understood in the foreign exchange market as a buyer or seller, thereby affecting a particular exchange rate in the monetary sector, the active intervention of the central banks. In a system of fixed exchange rates, these procedures are performed dutifully, and aim to achieve at least the specified intervention points above or below a middle course. In the long term thereby vary the exchange rate foreseeable within a relatively small bandwidths.
Effects
Fixed exchange rates are a reliable basis for calculating exporters, importers and other market participants in the foreign exchange markets. By " floating " exchange rates increase the risks for market participants; Equity, interest rate and foreign exchange markets are subject to greater price fluctuations ( volatility ). Only the free fluctuation of exchange rates has led banks to seek especially in proprietary trading profit opportunities. Without " floating " may bank failures as the Herstatt Bank would not have occurred. The international speculation has contributed to the strengthening of price volatility. When floating can be assumed that foreign exchange reserves have arisen either from interventions still be used for that.