Floating exchange rate

No level is announced and none is defended. The rate is whatever transactions clear at, moment by moment, and it changes with trade flows, capital flows, rate expectations and positioning. Most heavily traded currencies float in this sense, and a floating rate is what allows a central bank to run a policy rate aimed at domestic conditions, because the currency, rather than the reserve stock, absorbs the adjustment when conditions differ from those abroad.

Pure floats are rarer than the label suggests. Many floats are managed, meaning the authorities intervene occasionally, or comment in a way intended to influence the rate, without committing to any level they can be held to. The International Monetary Fund classifies arrangements along a spectrum from free floating through floating, crawl like and stabilised arrangements to hard pegs, and a currency can move between categories as behaviour changes without any announcement being made at all.

Two misreadings are common. The first is treating floating and fixed as a clean binary when the practical distinction is one of degree. The second is treating a floating rate as a fair or correct rate: it is the price at which flows balanced at a moment, including speculative and hedging flows, and it can sit a long way from any estimate of value derived from prices or productivity for years at a time.