Floating Exchange Rate
A currency price set by the foreign exchange market based on supply and demand relative to other currencies. Long-term changes reflect differences in interest rates and relative economic strength, while short-term moves reflect day-to-day supply and demand, speculation and events. Most major global currencies float.
Related terms
Exchange Rate
The rate at which one currency can be exchanged for another, the value of one currency expressed in terms of a second. Rates fluctuate constantly in the open market and can be free-floating or fixed.
Read full definitionRevaluation
An upward adjustment of a country’s currency relative to a baseline such as gold, wages or another currency. In a fixed exchange rate economy only the central bank can revalue; in a free-floating one, market forces drive it. It is the opposite of devaluation.
Read full definitionSoft Currency
A currency whose value fluctuates and is mostly lower than other currencies due to weaker demand, usually caused by economic or political uncertainty. Many developing-country currencies are soft, sometimes worsened by pegs to major currencies that leave exchange rates unfavourably high for investors.
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Spot Rate
The current market exchange rate at which one currency can be bought or sold for immediate delivery. Spot trades typically settle two business days later (T+2).
Read full definitionForward Contract
An agreement to exchange a set amount of one currency for another at a fixed rate on a future date. It locks in today’s rate, protecting a business from adverse currency moves before a payment falls due.
Read full definitionFX Swap
The simultaneous purchase and sale of the same amount of a currency for two different value dates, typically a near leg at spot and a far leg forward. It is used to roll a hedge forward or manage short-term cash-flow timing.
Read full definitionCurrency Pair
Two currencies quoted against each other, such as GBP/USD. The first is the base currency and the second the quote currency; the price shows how much of the quote currency one unit of the base is worth.
Read full definitionBid-Ask Spread
The difference between the price at which the market will buy a currency (bid) and the price at which it will sell (ask). A tighter spread means lower transaction costs.
Read full definitionPip
The smallest standard increment by which a currency pair moves, usually the fourth decimal place (0.0001). Pips are the common unit for quoting spreads and price movements.
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