Question

What is the managed or “dirty” float? Why do nations try to manage their exchange rates?

Answer 1

The managed or “dirty” float :

Definition :

• Market forces of demand and supply is not controlled entirely the Floating currency exchange rate system. Instead this at least we can partially controlled by government intervention that limits appreciation or depreciation of the currency within a range. this is the managed or dirty float.

Nations try to manage their exchange rates:

• A managed float, the central bank allows market forces to determine second-to-second (day-to-day) fluctuations in exchange rates but intervenes if the currency grows too weak or too strong.
• In other words, it tries to keep the exchange rate range bound, ostensibly to protect domestic economic interests (exporters, consumers) who would be hurt by rapid exchange rate movements. Those ranges or bands can vary in size from very wide to very narrow and can change levels over time.
• Central banks intervene in the foreign exchange markets by exchanging international reserves, assets denominated in foreign currencies, gold, and special drawing rights (SDRs),for domestic currency.
• The exchange rates regulates only indirectly because of most exchange rates are set on the open foreign exchange market. In countries like china, where the rate is fixed,here the government exchange the rate directly.This action of China affects the U.S. Dollar because the yuan, the Chinese currency, is loosely pegged to it.
• In U.S , if it lowers the rate, that drives down interest rates throughout the U.S. banking system. It also reduces the supply of money. Both of these results make the dollar stronger relative to other currencies. That's because U.S. dollar-denominated credit has become more expensive. At the same time, dollar-denominated assets generate a higher return. Both create more demand for the dollar, while taking it out of circulation. The laws of demand and supply tell you that less supply and more demand drives up the price.
• Exchange rates, Treasury notes, and foreign exchange reserves offer three ways to measure the value of the dollar. Although the government is powerful in influencing exchange rates, it is still forex trading that actually changes them.