Floating

A "floating exchange rate" is not determined by a set rate; it rises and falls based solely upon supply and demand (i.e. what the market wants and what the country can supply to the market).

Imports and exports affect the exchange rate as well. If a country is selling a lot of their products, then their rate will be very good; however, if they are having to buy a lot, it won't be. In this scenario, a country would not be trying to manipulate their imports and exports by their currency exchange rate as they would be if they were using a pegged rate.

Most of the more developed countries use this method of exchange. It gives them more freedom. If they expect their economy to do well, and it does, then their exchange rate will be good. If they are doing well they will be able to make money, if not, they will lose money. It's a risk a country has to take.

Floating Exchange Rates (as of June '98).