Types Of Foreign Exchange System

Foreign exchange market is the major financial market in the globe with a standard daily return greater than 2 trillion US dollars. It is the market where currencies are exchanged and traded. Traders from all over the world buy/sell one currency for one another and try to gain some profits in the minor deviations of price as a consequence of market speculation. There are various types of foreign exchange system that operates in exchange market. Read on to know about the different types of foreign exchange system.

Given below are the main kinds of foreign exchange system foreign exchange systems that operate in the foreign exchange market.

Flexible exchange rate system

Flexible foreign exchange rate system is the first kind of foreign exchange system. In this system, the financial power i.e. the central bank regulates the exchange rate to influence the supply and demand for foreign currencies.

Fully fixed exchange rate system

Fully fixed exchange rate system is one of the other different types of foreign exchange system. In this system, the government or central bank interfere in the currency market so as to keep the rate near to a fixed target. However, it is engaged to a single fixed exchange rate and does not allow major fluctuations from this central rate. It also provide greater certainty for exporters and importers and, under normal circumstances, there is less speculative activity - though this depends on whether dealers in foreign exchange markets regard a given fixed exchange rate as appropriate and credible.

Semi-fixed exchange rates system

In this type of exchange rate system, currency can move within an accepted range, but the exchange rate is the preponderant target of economic policy-making. However, interest rates are set to meet the target exchange rate. This is another different foreign exchange system online.

Free floating exchange rate system

The other types of foreign exchange system online also include the free floating exchange rate system. In this system, the value of the currency is characterized solely by supply and demand in the foreign exchange market. In other words, it is the monetary system where exchange rates are permitted to move due to market forces without interference by national governments. In this foreign exchange rate system, the trade flows and capital flows are the major factors that affect the exchange rate. One of the great advantages of this system is that fluctuations in the exchange rate can provide an automatic adjustment for countries with a large balance of payments deficit.

Make sure you know the above types of foreign exchange system so as to trade more successfully in the foreign exchange market.