Floating (currency rates)

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Floating (English " floating ", " swimming ", " drifting ") is the term used in banking for a system of freely fluctuating exchange rates , in which price formation on the foreign exchange market is left to the unaffected supply and demand . The floating is thus a market economy compliant currency regime.

prehistory

The Bretton Woods Agreement provided for the opposite system of fixed exchange rates since July 22, 1944 , which was able to provide relative stability in the industrialized nations until the early 1970s. The core of the system was the definition of ranges between which the exchange rates could fluctuate. These ranges consisted of an upper and a lower intervention point . If one of the two was reached by the current exchange rate, the central bank of the country concerned was obliged to intervene in the foreign exchange market. For example, if the US dollar was at the lower intervention point in Germany, the Deutsche Bundesbank had to buy US dollars against payment of DM and vice versa. The dollar rate was strengthened by the purchases, so that the intervention prevented the rate from falling below the lower intervention point. The consequence of this, however, was that the Bundesbank's purchases made it available to the banks in DM in return for the creation of money , which led to the liquidation of the money markets . This undesirable inflationary effect was compensated for by countermeasures by the Bundesbank, such as an increase in minimum reserves (“fine-tuning”). Other central banks followed suit.

species

There are several subspecies of floating exchange rates. Depending on which currency regime a country or several countries follow, one speaks of block floating , controlled floating or managed floating .

Block floating

The heterogeneous economic development of the western industrialized countries made it impossible to stick to this system of fixed exchange rates because the central banks had to intervene more and more frequently. Strong export nations like Germany tended to be suspected of revaluation , countries with a negative trade balance like the USA were potentially at risk of devaluation . The fixed exchange rates were first eased on September 30, 1969, on September 17-18. December 1971 an agreement was made on the reorganization of exchange rates through so-called central rates as part of the Smithsonian Agreement . It was a matter of increasing the bandwidths from ± 1% to ± 2.25%.

The European Economic Community decreased their area on April 24, 1972 these ranges of ± 1.125%. On March 19, 1973, the EEC began jointly "block floating" against the US dollar, which replaced the previously applicable fixed exchange rates in favor of freely fluctuating exchange rates. Within the EEC currencies it remained at fixed exchange rates (range of ± 1.125%; "currency snake"). This block of currencies only no longer had a fixed range against the US dollar. However, the “currency snake” suffered latently from an unstable composition of the block of currencies. Block floating was transferred to the European Monetary System on March 13, 1979 .

Controlled floating

With controlled floating , the central bank influences exchange rate movements through active intervention in the foreign exchange market, but without setting and announcing a range for the exchange rate in advance or undertaking to maintain such a range. There are therefore neither explicit nor implicit behavioral characteristics of a central bank that would signal its intervention. Rather, they intervene when they see economic and / or psychological reasons for this. Interventions here are aimed solely at dampening (all too large) exchange rate fluctuations.

Managed floating

The so-called managed floating (or Dirty Floating ; dirty floating) is an exchange-rate regime, in which the exchange rate fluctuates basically free, but the central bank intervenes from time to time to achieve its exchange rate target. In contrast to fixed exchange rates, the central bank does not undertake to keep a certain rate stable, so it can react more flexibly. After the Asian crisis , many of the countries affected switched from fixed currencies (pegged to the US dollar ) to managed floating . In principle, the European Central Bank also follows the principle of managed floating , but does not publish an exchange rate target. At the end of 2008 it intervened in the dollar market to dampen the strong rise in the euro. The euro is therefore subject to a managed floating or free floating strategy .

Interventions

In the currency sector, intervention is understood as the active intervention of the central banks in the currency market as buyers or sellers in order to influence a certain currency rate. In a system of fixed exchange rates, these interventions are dutifully carried out and aim to achieve at least the specified intervention points above or below a mean rate . In the long term, this means that exchange rates will fluctuate within a relatively narrow range foreseeably.

Effects

Fixed currency rates are a secure calculation basis for exporters , importers and other market participants in the foreign exchange markets. “Floating” exchange rates increases the risks for those involved in the market; Stock, interest and currency markets are exposed to greater price fluctuations (volatilities). It was only the free fluctuation of exchange rates that prompted credit institutions to look for profit opportunities , especially in proprietary trading . Without “floating”, bank failures like the one at Herstatt Bank might not have occurred. International speculation has contributed to the increase in price volatility. In the case of floating , it can be assumed that currency reserves were neither created nor used for interventions.

Individual evidence

  1. ^ Paul JJ Welfens / Axel Börsch-Supan, Springer's Handbuch der Volkswirtschaftslehre 2 , 2005, p. 298
  2. Beate Reszat, The short- and long-term monetary policy efficiency of rules for foreign exchange market interventions , 1984, p. 104
  3. Beate Sauer, From securing liquidity to striving for income: A turnaround in the reserve policy of central banks ?, 2011, p. 164
  4. ± 1.125% bandwidth means that the lower intervention point is 1.125% below the mean rate and the upper intervention point is accordingly above