What Is Meant By Currency Float? What Are Its Advantages And Disadvantages?
Science and scientist 2022-12-27 | 03:14 867 views The floating currency is intended to leave the value of a country’s currency to supply and demand when compared to another currency. There are millions of traders around the world buying and selling currencies, which helps determine their value for others. The floating exchange rate is determined by these daily interactions between traders. If investors By buying the US dollar heavily, it is likely that its value will rise against other currencies, and this means that more dollars will be needed to purchase the same number of goods from abroad.
The writer, Mohamed Abdel-Khalek, is an economic analyst
How Does The Currency Float System Work?
The basis of the currency floating system is supply and demand. If the supply is greater than the demand, the value of the currency will decrease. On the contrary, if the demand is greater than the supply, its value will increase.
In the short term, the float can be affected by factors such as speculation, natural disasters, and political news, for example: elections can often lead to periods of negative sentiment if an extremist party has a chance to grab power.
As for the long term, the floating exchange rate in the foreign exchange trading market tends to fluctuate based on the economic performance of the country and its trade balance, if the economy is performing poorly it tends to see less investment from abroad, this means that less demand is made for the currency and thus exerting negative pressure on its worth.
The trade balance is the net of what a country exports and imports, so if a country imports more than it exports it has a net flow of its currency, this is because it demands more goods from other countries than those countries demand from them domestically, in return, the country sends more of its currency to abroad, thus increasing the market supply and decreasing its value.
Theoretically, a flotation mechanism can help countries recover from recession. This is because their currency tends to weaken as a result of poor economic performance. In turn, exports become more competitive because they are cheaper in the international market.
This can help provide a boost to local exporters. At the same time, imports become more expensive. This may make goods more expensive in the short term but has the potential to boost alternative domestic suppliers who become relatively cheaper.
Advantages Of Floating Exchange Rate
- Stability in the trade balance
The trade balance is the difference between what a country imports and what it exports. It may also be known as “net imports”. This is an important economic aspect because it is a component of a country’s economic output.
A floating exchange rate allows for more stability in this region as the currency is volatile. When a currency depreciates it means that exports become cheaper to the rest of the world. This provides a boost to the balance of trade between countries as they can export more because they are relatively cheaper than their competitors.
By contrast, when a country sells a large number of goods abroad and has a positive trade balance, its currency is likely to strengthen. This means that other countries will start to find it more expensive to import from that country. In turn, countries may look where Another about cheaper goods, which negatively affects the exchange rate.
- Stability of inflation
One of the main drawbacks of a fixed exchange rate is that countries will naturally “import” higher rates, so the benefit of floating is that hyperinflationary countries will experience a depreciation of their currency, and this will then help offset the inflationary effect on other countries.
- Decrease in foreign exchange reserves
By working under a system of floating exchange rate, the central bank in the country no longer needs large reserve currencies to stabilize the exchange rate, under the system of fixed exchange rate central banks need a wide range of currencies, and this means that if Needed to strengthen its currency it will sell foreign reserves thus increasing other supply in the market and lowering the value.
Instead, under a system of floating exchange rates, that same money can be used in a way that benefits the broader economy.
- Independence
under a fixed rate system shall operate central banks For different countries in line with each other, for example: if a country raises interest rates to deal with inflation other central banks will need to respond, this is because what happens in one country is likely to affect monetary conditions in another country.
When currencies are linked to the dollar, changes in the value of the dollar will have an impact on the value of other currencies. In contrast, these countries are subject to the feelings of the US Federal Reserve Bank and its monetary policy. By contrast, floating the exchange rate allows countries to decide on their monetary policy. Without focusing only on other countries.
- Fewer speculative attacks
When a currency is artificially forced to stay at a fixed level, there is often bubbles in market activity. Investors know that a currency is undervalued, but with a fixed exchange rate central banks struggle to maintain the exchange rate. Constant.
There is a point where the countries currency remains stagnant, but the fundamentals appear to be undervalued or overvalued, this opens the door to speculative attacks on the currency as it seeks to make some easy money, and this in turn can lead to drastic shifts in the foreign exchange market which can cause great distress to national economies.
In contrast, a floating exchange rate is constantly changing reflecting a wide range of underlying conditions ranging from inflation to economic performance, so the exchange rate is largely in line with its underlying value.
Disadvantages Of Floating The Exchange Rate
- Exacerbation of economic issues Countries
may face economic difficulties at home, there may be excessive inflation rates, economic stagnation or poor job opportunities, all of which can play a role in the foreign exchange market.
As a result of the flotation, investors look at the basic features of the economy to determine its value, and these basics include economic indicators such as growth and inflation, so when these indicators perform poorly, they are likely to lose value against other currencies.
The float also has the potential to drive the economy down as a weak currency puts pricing pressures on its imports, so for countries that import heavily they may face higher prices that will likely reduce consumer demand.
- Possible volatility
One of the main problems with a flotation is that it can create volatile conditions for companies and countries, a sharp depreciation in the value of a currency can greatly affect the dynamics of its economy, imports become significantly more expensive which puts pressure on value-adding exporters, moreover Companies that import raw materials will see higher prices as a result.
If the economy is formed in such a way that imports are a major component, it may struggle more during periods of currency weakness. By contrast, countries such as export-led China may benefit, since most of their business is focused on exporting their goods become cheaper abroad and thus Increased demand and improved economic conditions at home.
- Weak monetary policy
Excuses flotation system The central bank has the responsibility of maintaining its currency peg, instead, it has the autonomy to pursue its monetary policy and economic agenda.
This is a two-sided coin. On the one hand, a well-managed monetary system can take advantage of this freedom, and on the other hand, mismanagement can lead to hyperinflation and financial crisis.
Many countries have tried to work their way out of debt by floating the currency, but the result has always been excessive levels of inflation and a bad credit rating. Instead, countries that may struggle to manage their monetary policy are better off having a fixed exchange rate. LINK
The Central Bank Holds A Meeting To Discuss The Repercussions And Indicators Of The Rise In Exchange Rates In The Local Markets
Today, Tuesday, the Central Bank of Iraq issued recommendations to merchants and banks about exchange rates.
And the media office of the bank stated, in a statement received by (Al-Oula News), that “the board of directors of the Central Bank of Iraq held a meeting and discussed the repercussions and indicators of the rise in exchange rates in the local markets and the temporary pressures that the foreign currency exchange rate has been exposed to for days, resulting from internal and external factors.”
He added, “Given the adoption of mechanisms to protect the banking sector, customers and the financial system, as all foreign trade requirements (for the purposes of documentary credits or transfers) are fully covered by the official price (1465) dinars to the dollar for documentary credits and (1470) dinars to the dollar for transfers.”
The Central Bank called on merchants to review banks directly and not resort to brokers and speculators to avoid charging their imports with undue commissions and expenses, referring in this regard to what was issued by the Council of Ministers in its decision No. (351) for the year 2022 regarding non-payment of customs duties and amounts of tax secretariats in advance. This will reduce extra loops, ease procedures, and remove costs resulting from pre-demarcation problems.”
And the Central Bank stressed, “Banks must assume their responsibilities in facilitating and expediting procedures for their customers to ensure their access to financing with the best banking practices and with the least amount of loops, taking into account the established legal requirements.” LINK
The Central Bank Issues Recommendations To Merchants And Banks Regarding Exchange Rates
Today, Tuesday, the Central Bank of Iraq issued recommendations to merchants and banks about exchange rates .
The media office of the bank stated, in a statement received by the Iraqi News Agency (INA), that “the board of directors of the Central Bank of Iraq held a meeting and discussed the repercussions and indicators of the rise in exchange rates in the local markets and what the foreign currency exchange rate has been exposed to for days, from temporary pressures resulting from internal and external factors.” .
He added, “Given the adoption of mechanisms to protect the banking sector, customers and the financial system, as all foreign trade requirements (for the purposes of documentary credits or transfers) are fully covered by the official price (1465) dinars to the dollar for documentary credits and (1470) dinars to the dollar for transfers.”
The Central Bank called on “merchants to review banks directly and not resort to brokers and speculators to avoid charging their imports with undue commissions and expenses, referring in this regard to what was issued by the Council of Ministers in its decision No. (351) for the year 2022 regarding non-payment of customs duties and amounts of tax secretariats in advance. This will reduce redundant loops, ease procedures, and remove costs resulting from pre-demarcation problems.”
The Central Bank stressed, “Banks must shoulder their responsibilities in facilitating established and expiring procedures for their customers to ensure their access to financing with the best banking practices and with the least amount of loops, taking into account the legal requirements.”
https://www-ina-iq.translate.goog/174160–.html?_x_tr_sl=auto&_x_tr_tl=en&_x_tr_hl=en
Central Bank: The Exchange Rate Of The Dollar Is Exposed To Internal And External Pressures
Economie| 01:23 – 12/27/2022 Baghdad – Mawazine News The Central Bank of Iraq confirmed today, Tuesday, that the foreign currency exchange rate is subject to temporary pressures resulting from internal and external factors.
The media office of the bank stated in a statement, a copy of which Mawazine News received, that “the board of directors of the Central Bank of Iraq held a meeting and discussed the repercussions and indicators of the rise in exchange rates in the local markets and the temporary pressures that the foreign currency exchange rate has been exposed to for days, resulting from internal and external factors.” “.
He added, “Given the adoption of mechanisms to protect the banking sector, customers and the financial system, as all foreign trade requirements (for the purposes of documentary credits or transfers) are fully covered by the official price (1465) dinars to the dollar for documentary credits and (1470) dinars to the dollar for transfers.”
The Central Bank called on “merchants to review banks directly and not resort to brokers and speculators to avoid charging their imports with undue commissions and expenses, referring in this regard to what was issued by the Council of Ministers in its decision No. (351) for the year 2022 regarding non-payment of customs duties and amounts of tax secretariats in advance. This will reduce redundant loops, ease procedures, and remove costs resulting from pre-demarcation problems.”
And the Central Bank stressed, “Banks must assume their responsibilities in facilitating and accelerating procedures for their customers to ensure their access to financing with the best banking practices and with the least amount of loops, taking into account the established legal requirements.” Ended 29 / M99
https://www.mawazin.net/Details.aspx?jimare=215246
Central Bank: The Dollar Rose Due To Temporary Pressures Resulting From Internal And External Factors
Economy News _ Baghdad Today, Tuesday, the Central Bank of Iraq explained the reasons for the rise in the exchange of the US dollar.
The bank stated, in a statement received by “Al-Iqtisad News”, that “the Board of Directors of the Central Bank of Iraq met on 12/27/2022 and discussed the repercussions and indicators of the rise in exchange rates in the local markets and what the foreign currency exchange rate has been exposed to for days, from temporary pressures resulting from internal and external factors.”
Given the adoption of mechanisms to protect the banking sector, customers and the financial system, and since all foreign trade requirements (for the purposes of documentary credits or transfers) are fully covered by the official price (1465) dinars to the dollar for documentary credits and (1470) dinars to the dollar for transfers.
The statement added, “We urge the merchants to review the banks directly and not resort to brokers and speculators to avoid charging their imports with undue commissions and expenses, referring in this regard to what was issued by the Council of Ministers in its Resolution No. (351) of 2022 regarding non-payment of customs duties and amounts of tax secretariats in advance. This will reduce redundant loops, ease procedures, and remove costs resulting from pre-demarcation problems.”
The Central Bank called on “banks to assume their responsibilities in facilitating and expediting procedures for their customers to ensure their access to financing with the best banking practices and with the least amount of episodes, taking into account the established legal requirements.”
Views 10 Added 12/27/2022 – 1:32 PM Updated 12/27/2022 – 2:01 PM
https://economy-news.net/content.php?id=31546
In The Document, The Central Bank Takes Action To Address The Rise In The Exchange Rate
Money and business Economy News – Baghdad The Central Bank of Iraq decided to stop the work of collecting taxes in advance to deal with the high exchange rate. https://economy-news.net/content.php?id=31533
The Central Bank Of Iraq Explained, On Tuesday, The Reasons For The Rise In The Exchange Rate Of The US Dollar.
2022-12-27 04:19 Shafaq News/ And the exchange rates of the US dollar continued to rise against the Iraqi dinar, today, Tuesday, in the main stock exchange in the capital, Baghdad, and in the Kurdistan Region, to approach 160,000 dinars against 100 dollars, for the first time since its price was officially approved in the state budget at 146,000 dinars per year. 2020.
The bank stated in a statement received by Shafaq News agency; That “the Board of Directors of the Central Bank of Iraq met on 12/27/2022 and discussed the repercussions and indicators of the rise in exchange rates in the local markets and what the foreign currency exchange rate has been exposed to for days from temporary pressures resulting from internal and external factors, given the adoption of mechanisms to protect the banking sector, customers and the financial system.”
And since all foreign trade requirements (for the purposes of documentary credits or transfers) are fully covered by the official price (1465) dinars to the dollar for documentary credits and (1470) dinars to the dollar for transfers.
The statement added; “We urge merchants to review banks directly and not resort to brokers and speculators to avoid charging their imports with undue commissions and expenses, referring in this regard to what was issued by the Cabinet in its Resolution No. (351) of 2022 regarding non-payment of customs duties and amounts of tax secretariats in advance, as it will lead to This aims to reduce extra rings, ease procedures, and remove costs resulting from pre-demarcation problems.”
The Iraqi Central Bank called on “banks to shoulder their responsibilities in facilitating and accelerating procedures for their customers to ensure their access to financing with the best banking practices and the least amount of episodes, taking into account the established legal requirements.” LINK
