Currency is one of the core topics that every trading enthusiast should master when you wish to
trade forex. In layman’s terms, currency is simply called money. Technically, this is used as a medium of exchange for items that are purchased and services that are availed. Whether they are in the form of bills or coins, currencies are issued by the government and their values depend on the economic status of the country that owns it as well as how they are pegged. Currencies come in various types so today, we shall talk about floating currency.
Floating Currency Meaning
This is a monetary system that is adopted by a particular country. With this system, a country’s official legal tender or currency is not backed up by gold or other assets. Thus, their value in the forex market depends on the demand of the people and foreign reserves as well. With this in mind, rates for this type of currency are influenced by the law of supply and demand. This goes to show that the currency appreciates if the demand for a particular floating currency is high and it depreciates if it goes the other way round.
Advantages of floating currency
1.To avoid inflation
High Inflation rate is one of the things that are avoided by a particular country’s administration because this could signal that their economy is experiencing an economic crisis. Since you are currently studying the nature and advantages of floating currency, one of the benefits of this type of currency is its ability to avoid inflation by insulating a country from this crisis. This is made possible when the government pursues internal policy objectives such as full employment growth in the absence of demand-pull inflation without external constraints like debt burden or shortage of foreign exchange.
2.To enhance market efficiency
Technically, a market efficiency is defined as the degree to which market prices depict all available, relevant information. If a country has a floating currency, the economic determinants affect the exchange rate for international markets which, in turn, affect portfolio flows between countries.
3. For easy management of finances
With the currency placed under a floating rate, the government has the freedom to manipulate or control the value of their money towards their advantage.
Disadvantages of floating currency
Despite the advantages of such a currency type, there are also drawbacks that you have to discover and understand.
Dealing with a floating currency will bring uncertainties in your profits. This happens because currency rates change from time to time. So, if you have invested in a business using floating currency, you cannot predict your actual profit until you have it in your hands. This makes it difficult to plan ahead of time.
Floating currencies are some of the favorite prospects of speculators because they are volatile. Since the currency is fast moving, fluctuations in rate will require you to apply more complex trading and planning strategies especially when you decide to trade forex.
There are lots of floating currencies that are traded in the forex market. It is therefore advised that forex traders should learn to find ways to use such a currency to their advantage by means of devising plans and strategies that mitigate its drawbacks.