In this article, We learn about “Dirty float “.Let’s Go!
Dirty float or Managed float These two terms refer to the foreign exchange system in which the central bank intervenes in the foreign exchange market to manipulate the balance of supply and demand to ensure exchange rate stability. Suppresses volatility in a specific currency.
Central bank intervention is intended to avoid the consequences of economic shocks or speculative attacks that could lead to sharp exchange rate fluctuations with potentially catastrophic effects on the domestic economy.
For decades, the currencies of major industrialized countries have implemented a fixed exchange rate system. With the advent of trade liberalization and globalization, this system was gradually opened up in the 1980s and 1990s.
The currencies of most developed countries now officially float freely, although their central banks occasionally act in foreign exchange markets to limit this floatability.
These actions aimed at protecting economic stability tend to have a favorable impact on multinational corporations because they limit their currency risk.
For example, the Swiss National Bank (SNB) maintained the “currency floor” of the EUR/CHF at 1.20 to avoid excessive appreciation of the Swiss franc against the currencies of the EU’s major trading partners.
The appreciation of the Swiss franc currency will harm the competitiveness of Swiss exports.
In January 2005, after years of market operations to defend this upper limit, the Swiss National Bank decided to abandon the 1.20 lower limit without prior notice, triggering a sharp depreciation of the euro.
If you want to learn more foreign exchange trading knowledge, please click: Trading Education.
