Key Diagrams - Free Floating Exchange Rates

In this short revision video we look at three factors that might cause a movement in a free-floating currency.

A free-floating exchange rate occurs when a government allows the exchange rate to be determined purely by market forces and there is no attempt to ask the central bank to influence the external value of the exchange rate.

Context: The UK has followed a free floating currency system since September 1992 when the UK left the EU’s exchange rate mechanism.

IMF Survey of Currency Systems (2021)

Examples of countries with a free-floating exchange rate:

• United Kingdom
• Australia
• Mexico
• Poland
• United States
• EU Monetary Union nations (19)

In an exam, explain movements in a currency carefully:

Appreciation = increase in the value of an exchange rate

Depreciation = decrease in the value of exchange rate

Note: Revaluation and devaluation should only be used when discussing fixed currency systems.