Fixed Vs Floating Foreign Exchange Rates

Open economies in a global market are confronted with three objectives - stabilising the exchange rate, enjoying international capital mobility and engaging in a monetary policy tailored for domestic goals.
Unfortunately, desirable as these are, they are contradictory. Fixed forex rates stabilise the rate while engaging in domestically-oriented monetary policy, these don't coincide with enjoying international capital mobility, which is where floating forex rates come in.

Fixed forex rates

A fixed foreign exchange rate is when a currency's value is pegged to the value of another currency, group of currencies, or another asset, like gold. Fixed rates were used globally from 1944 to 1973, but now fixed rates are mainly used by small countries with economies that are largely dependent on foreign partners.
Fixed exchange rates are infrequently evaluated for political and economic reasons, either being revaluated or devaluated. A devaluation in a fixed rate lowers the value of the fixed currency, making exports more attractive to foreign investors as they become cheaper when their value is converted into the investors' currencies. This also discourages imports as imported goods become more expensive due to the forex rate, the ultimate goal being to increase trade surpluses while decreasing trade deficits.
A revaluation raises the value of the fixed currency, causing the opposite scenario to occur.

Floating forex rates

Floating foreign exchange rates are when a currency's value changes depending on factors in the forex market, such as the currency's economy, investor sentiment, politics, inflation and interest rate derivatives.
This is the most common regime for major economies with two variants: free floating currencies and managed floating currencies.
The value of free floating currencies is solely determined by forex market forces and can fluctuate greatly, providing opportunities for traders to profit on rising and falling currency values.
Managed floating currencies are allowed to float to a certain extent, and will be reined in by the central bank if it travels too far from ideal levels.
That being said, every floating rate is managed, at least slightly. If a currency goes too far off course, that country's central bank will respond by changing interest rates or by buying and selling large amounts of currency to bring its currency back to acceptable levels.

Fixed vs. Floating forex rates

Fixed exchange rates benefit from reduced risks in international trade and investment as international buyers and sellers can agree to a price that won't be vulnerable to forex rate changes. Fixed rates can introduce stricter economic management, keeping inflation under control, and they can also reduce speculation, which can be destabilising to less-established economies.
However, the disadvantages of fixed rates are that there is no automatic balance of payments between nations without government interference; large holdings of foreign exchange reserves are necessary to maintain the fixed rate; the need to maintain the exchange rate can dominate monetary policy, which may be better focused on other things; and fixed exchange rates can be unstable, resulting in different rates of inflation causing imbalances of the levels of competitiveness between different countries.
Countries with floating exchange rates benefit from allowing the market to quickly respond to economic events, as opposed to waiting for the central bank's reaction. As the forex market is open 24-hours a day, free floating currencies can react very quickly to significant news. This also results in automatic correction in balance of payments adjustments as the exchange rates adjust to balance supply and demand.
As this will be taken care of automatically, governments should have more time to devote policy to other matters.

As floating rates change automatically, they don't suffer from international relations crises that can plague countries with fixed foreign exchange rates when pressure mounts on a currency to devalue or revalue.
And countries with floating exchange rates can have lower foreign exchange reserves.

However, floating exchange rates result in instability and uncertainty when it comes to international trade, as fluctuations can result in changing prices for imports and exports. This uncertainty can also lead to a lack of foreign investment. Having said that, this risk can be hedged by trading with forward transactions.
Floating exchange rates can result in undisciplined economic management as inflation is not punished, and governments may follow inflationary economic policies.
However, the downside of this is that severe shocks can cause a currency to plummet, magnifying the economic damage. And, as speculation is higher in floating exchange rate regimes, there is more uncertainty for forex traders and investors. A floating exchange rate can also cause inflation by allowing import prices to rise as the exchange rate falls.

Check out my blog Talking Forex - a beginner's guide to forex to learn more about forex trading. Also, the site of my preferred forex provider has a lot of good information on forex and forex trading, including examples and FAQs.
I am not a financial adviser, and the information in this blog is just intended to inform and not advise. Please remember that forex is a leveraged product, so it's possible to lose more than your original investment. Forex trading might not suit everyone, so please ensure that you fully understand the risks involved with this type of trading.
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Riding the Rapids With a Foreign Exchange Trader

Since its beginnings in the 1970s, not too many people would have believed then that the foreign currency exchange market would have such an impact on the world. Thirty years later, it seems like everyone wants to become a foreign exchange trader and get in on what has been recently documented as the world's largest financial market in respect to liquidity. This market is extremely circulatory, with as much as three trillion dollars exchanging hands on a daily basis. Statistics show no slowing down, either.

The foreign exchange market is more over-the-counter than, say, stocks or bonds; however, both are based on the exchange of money. It only happens more so in the Forex trading arena. It is important to make note that both the stock exchange and the Forex marketplace reinforce each other in the face of worldly business transactions.

When technically analyzing the two, this creates a structure from which the foreign exchange trader can base his or her decisions. Of course, the analysis will be done by a professional that is well versed in price patterns, as well as the political and economical stability of other countries. This helps determine the value of the currency in that particular country.

A foreign exchange trader will be advised not to rely solely on what he or she is told by these professionals, however. It is good to keep these analyses in mind; but, it is also important to formulate one's own strategy when it comes to how one will make his or her transactions. There will be times when, if you decide to become a foreign exchange trader, that you will have to make decisions on a very spur-of-the-moment juncture. For the times that you may be cornered into a tight decision, it is best to have a plan for those types of moments so that you make an intelligent decision.

This personal plan that you will formulate will also help when faced with last minute changes. These can prove to be quite costly at times, and it is best if you have a plan and stick to it. Nothing is more severe than when you deviate from your plan and the losses prove costly, indeed.

One of the greatest parts of being a foreign exchange trader is that business is open twenty four hours per day, seven days per week. You can set your own schedule; you can even purchase software to help you out on the days that you don't wish to have to be in front of your computer. This twenty four/seven approach to business ensures that money is constantly being circulated around the world.

This is the only business where you can make as much money, that is not governed by any type of controls, such as the SEC when it comes to the stock exchange. This encourages more trades, which means more circulation and more money in your pocket if you play your hand right and stick to your plan.

Having a solid foundation for forex strategy is the key to success. You can only succeed in a risky market like currencies with the proper professional forex strategy assistance. Look no further! click any of the links to review the secret to successful forex trading.

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Currency Trading Tips: 2 Reasons Why Foreign Exchange Trading Can Help You Gain Financial Freedom

Over the last few years many so called "business gurus" have been sharing thousands of tactics to achieve financial freedom. An imperative thing to always remember is that several of these people you hear about are unique incidents and a lot of times what worked for them might not work for you.

In this section of my currency trading tips series I would like to discuss with you 2 reasons why I believe Forex can form a number of "unique" success stories and can allow you to achieve true financial freedom.

To tell you the truth I have realized that the less I trade (because I only take high probability trades) the more profits I produce.

I also know a number of other Forex traders who work on their trading at least 2-3 times as hard as I do and don't make half the returns I earn. Why is that? Because they are chasing their own tail! Over trading and impulsive trading are the basic causes why most of the people never succeed as currency traders.

Remember; ensure that you always work smart instead of hard.

Foreign exchange can provide you the time freedom no other one investment can: The majority of individuals who invest stick to the standard investment vehicles such as mutual funds, stocks, bonds, or real estate. These are smart investments if you are ok with only creating a ROI of 3%, 5%, or 7 %( if you are lucky) per year. Nevertheless, if you want to earn some serious gains the currency market is what you should be investing funds in.

Trading the FX Market can allow you to earn enough capital to pay back your debt off, go on a vacation, put a down payment on a house, and far more.

As a FX trader you can trade from anyplace across the globe and at any moment you want. In the last number of years I have traded from several vacation destinations and countries.

Aside from that, quite a few times I am able to spend time with my family whenever I want. How many folks do you know that can take their family to the beach on a Tuesday afternoon? Not many.

This is the kind of time freedom the Forex market can give you. When you make a steady income stream from currency exchange trading you will be able to trade whenever you want and from where ever you want.

I hope you enjoyed this section of my currency trading tips and don't forget to come back soon as I post useful articles very week.

Sincerely,
Jay Molina
Pro currency trader & mentor

Jay Molina is an advanced Forex trader that helps other investors around the world to learn about the Forex market and its rewards and risks. For more currency trading tips, visit the link: http://www.myfxinvestment.com/.

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