Transition to a floating exchange rate. System of floating exchange rate

The exchange rate is the relative value of the currencies of two states. In other words, this is the value of one currency, which is expressed in units of another.

Exchange Rate Setting Modes

It is worth familiarizing with the existing regimes for setting exchange rates:

• Based on gold parities. The currencies that are tied to gold are correlated with each other at a fixed exchange rate. Earlier, the gold standard was the regulator of the world market of automatic type.

• Fixed rate. The central bank determines the exchange rate of the national currency. Basically, this refers to the limits of free fluctuations in the exchange rates of the national currency, which is done for macroeconomic stabilization purposes. For this purpose, the Central Bank purchases or sells a specific amount of foreign currency.

• Floating exchange rate. It is determined as a result of unlimited fluctuations in supply and demand. In this case, the exchange rate will be the equilibrium price of the currency in the foreign exchange market. At the same time, fluctuations in the exchange rate, volumes of imports and exports, and the state of the payment and trade balance are not limited by anything.

If the first two modes are understandable for understanding, then the floating exchange rate should be studied in more detail.

What is a flexible exchange rate?

A floating or flexible rate is a regime in which exchange rates on the market can vary depending on supply and demand. In the conditions of free oscillations, they can rise or fall. This also depends on the conduct of speculative operations in the market and the state of the balance of payments of the state.

Theoretically, the regime of free floating exchange rates should be the reason for establishing an equilibrium rate. In this case, the country will have sufficient capacity to regulate the economic state in the absence of external influence. However, in practice flexible courses are the cause of the emergence of destabilizing and unstable trends. The situation may be aggravated by the influx of speculative funds.

Conclusion of investment and trade agreements can become more difficult if partners are not sure of making a profit. For this reason, it is preferable for countries to regulate exchange rates using intervention. But quite often it turns into manipulating the exchange rate to gain a competitive advantage in trade with other states.

Creating a floating exchange rate system

In 1976, a meeting of the IMF's temporary committee took place, at which the Jamaican agreement was reached. This procedure fixed the demonetization of gold and the transition to floating exchange rates. In the Russian Federation, an appropriate regime was established by decree of November 15, 1991. The system of floating exchange rates was formed under the influence of the supply and demand ratio available in the currency markets of the state.

In carrying out commercial transactions to cover currency risk began to apply for urgent transactions. This method became popular even after the end of the sixties. This time was marked by the transition to the floating regime, the crisis of the Bretton Woods system, and the instability of the currency markets.

Reasons for creating a new system

In connection with the instability of foreign exchange markets, in 1964 it was announced the convertibility of Japanese and other world currencies. Thus, the United States has lost the ability to maintain the price of an ounce of gold. The state faced a rapid increase in inflation. Undoubtedly, the US government took a number of measures to combat this phenomenon, but they did not give a positive result.

The external debt of the US is increasing every year, but the biggest dollar crisis was in 1970, which was explained by a decrease in the interest rate. Next year, the balance of payments of the state experienced a severe deficit. Free conversion of dollars into gold was suspended.

To save the Bretton Woods system, much has been done. The intervention of about $ 5 billion did not work. After the devaluation of the dollar by 10%, developed countries made the transition to a floating exchange rate.

Elimination of the crisis

Before 1973, it was possible to make good money on transactions with monetary units. But in the extraction of speculative benefits, problems arose after fixed courses lost their relevance. At the same time, the regime of freely floating exchange rates has led to the bankruptcy of many large banks. At the same time, a large number of financial institutions were seriously affected. After the system was officially recognized, international financial relations began to be subject to regulation.

The transition to a floating exchange rate has made it possible to eliminate most of the shortcomings and problems. Despite the advantages of this mode, they have some disadvantages. First of all, it is worth noting the high volatility of monetary units (the amplitude of fluctuations in value over a certain period of time). In most cases, this negatively affects international export-import transactions.

The regime that is present in Russia

After the default, which occurred in 1998 in Russia, next year the regime of regulated currency was launched. From now on, the government has been able to reduce the degree of negative impact of external conditions on the public sector of the economy. A floating exchange rate was added by the introduction of a dual currency basket. It consisted of a combination of euro and dollar. Thanks to this action, it became possible to strengthen the management of the currency system.

After the introduction of the bi-currency basket, the ruble was oriented to the two most important world reserve units. At the same time, he got less dependence on the US economy.

If the price exceeded the established limits of the bi-currency basket, the state had the right to intervene in the quotations of the foreign exchange market. At the moment, this rule has lost its force, what happened after the world crisis. The government can make transactions with the currency regardless of the rate.

Freely floating exchange rate

This regime provides for the government's complete refusal to regulate the national currency relative to the monetary units of other countries. A freely floating exchange rate means the movement of the exchange rate, which is determined only by the market laws of supply and demand.

This policy is used by a small number of countries. More common is an adjustable floating exchange rate. It is more relevant, since the price varies within the established framework. When it reaches one of the limits, stabilization of the changed course is carried out with the help of monetary authorities. Most often, there are conversion operations in the open market with a reserve and national currency.

Effect of conversion operations

Conversion transactions are transactions that are aimed at the sale or purchase of monetary units that have pre-established terms of implementation, volumes and rate. States that use a floating and fixed exchange rate can make these transactions. They can affect the financial condition of the enterprise, the specific region and the country's economy as a whole. To get profit in this way, it is worthwhile to understand this issue competently.