HomeThe Forex market is based entirely on exchange rates and their fluctuations over time. Your Forex Online Training will tell you how to make use of this fluctuation, but most do not give in-depth information on how exchange rates are managed. Each country determines how it wants to control exchange rates and this decision can have a great effect on the strength of its economy. Here is a brief introduction to exchange rate regimes and how they play into the world market.
A fixed exchange rate can be based on a measurable value, such as gold, or on another country's currency. For instance, China's yuan used to be based upon the US dollar. As the dollar rose and fell, so did the yuan.
A linked exchange rate is similar to a fixed exchange rate. But whereas countries with a fixed exchange will go through a central bank to influence the world market and therefore their exchange rates, those with a linked exchange rate will not.
This link between two currencies makes for easier trades between the countries involved. This is especially helpful for developing countries that rely heavily on export to a particular country. However, it is often viewed negatively because of the dependence on an external factor, limiting the power of using internal methods to stabilize the economy.
A floating exchange rate regime means that the exchange rate is determined by the supply and demand in the foreign exchange market (among other factors). It is generally believed to be a more stable system. However, because rates in the Forex market are constantly changing, so are the exchange rates for individual countries. Most countries allow their rates to fluctuate within a certain limit. This fluctuation can hurt smaller countries and for this reason many emerging countries are hesitant to adopt a floating exchange rate. The predominant use of floating exchange rate regimes is what makes the Forex market necessary and profitable.
