Fixed and Floating Exchange Rate Systems Essay Example | Topics and Well Written Essays - 750 words

Fixed and Floating Exchange Rate Systems - Essay Example In fixed exchange rate system, the central bank decides the official rate of exchange of currency conversion which is fixed. This means that the traders would need to convert the currency of one country into the currency of another country at the rate of exchange fixed by the central banks. The fixed exchange rate systems could be classified as hard pegged exchange rate systems and soft pegged exchange rate systems. The hard pegged exchange rate system indicates that the pegging nation has lesser volume of control in the process of currency conversion and is very much dependent on the targeting nation. In hard pegged exchange rate systems, the fixed currency conversion rates are followed in a strict manner (Heakal, 2012). On the other hand, the soft pegged currency exchange systems are influenced by the fluctuation in the market conditions. The floating exchange rate systems are on the other hand marked to market. This means that these exchange rates fluctuate with the corresponding changes in the market supply and demand. The inflation or deflation in the economies leads to changes in the currency conversion rates. The exchanges rates in such conditions are said to be floating which corrects itself constantly with respect to the market and economic fluctuations. The exchange rate system that includes conversion of local currency pegged against the US dollars is an example of hard pegged exchange rate system. The currency is converted strictly with the rate of exchange for US dollars. In reality, no exchange rate system is fully fixed or floating. An example of soft pegged exchange rate system is the slight fluctuation in the rate of currency conversion due to changes in monetary supply in the economy. An example of floating exchange rate system is the auto-correction of the currency conversion rate due to the changes in the economic conditions. The devaluation of currency would lead to rise