The foreign exchange rate industry has gathered considerable momentum in the last few decades. It has been inviting many new investors to trade in the currency market. Given the fact that there is no central authority regulating the foreign exchange environment, the idea of trading in international currency seems a bit unsafe. The forex trade is based on independent buyers and sellers of these currencies who get in touch with each other via a broker and crack a deal. It is essential to register yourself with an experienced broker and create a trading account with them. Foreign exchange is dependent on fluctuations of the market and actions of government financial institutions. The traction between two independent currencies always determines the forex rate. There are three types of exchange rates that you should be familiar with before you step into the world of currency trading, namely a floating exchange rate system, managed exchange rate system and fixed exchange rate system. These different types of exchange rates are dependent upon the government’s financial institutions, independent market forces of demand and supply or both. So the governments always try to keep the value of their currency in a higher position than others in the trade.
Floating exchange rate system
In the free-floating exchange rate system, the governments do not interfere in the determination of the currency’s value. The floating exchange rate is also known as a flexible exchange rate, where the forces of demand and supply act as independent forces and resolve to set the value of the currency. Although the idea is to have a free market environment where the government won’t control rates, this is not possible in practice and exists only on paper. In reality, all governments and their central banks bring in policies which would alter the exchange rates of these currencies.
Managed exchange rate
Manages exchange rate is nothing but the government and its financial institutions interfering in the determination of free-floating exchange rates. Sometimes the currency of a nation swings violently, affecting the exchange rate and damaging the economy, to gain control over its fluctuations and maintain equilibrium between the two currencies. This works as a middle ground adopted by countries to keep their money safe and robust.
Fixed exchange rate system
In a fixed exchange rate system, the value of a currency is regulated by the government and its central bank. When the Bretton Woods System was in place, the amount of the money was tied to that of gold, after its ablation in the early 1970s the US dollar was tied to the cost of commodities. Now the governments were fixing the exchange rate of one currency against the dollars depending upon the price of their products.