Exchange rate policies

Exchange rate policies

The foreign exchange rate is known as the price of the local currency against the foreign currency, and each country adopts a set of policies towards the exchange rate. These policies are mostly represented in three main types, which are as follows:

Flexible exchange rate:

A flexible exchange rate is one that is determined by the influence of the forces of supply and demand in the foreign exchange market, without direct intervention by the central bank.

It is up to supply and demand to determine its value, as it increases if demand increases and decreases if demand decreases.

In some cases, the exchange rate may be affected by actions by a central bank, such as raising interest rates, which results in a change in demand for the currency.

Fixed exchange rate:

The fixed exchange rate is determined by a decision of the government or the central bank, and is achieved through the intervention of the central bank in the exchange market to prevent imbalance between the unregulated forces of supply and demand.

The global economic system operated on a fixed exchange rate system from the end of World War II until the early 1970s.

Supply and demand for the currency is controlled by central bank trading.

Linked exchange rate:

A linked exchange rate is a type of fixed rate, following a path set by a decision of the government or central bank.

It is achieved through central bank intervention in the foreign exchange market, similar to a fixed exchange rate.

The target value of this price can be changed periodically or randomly according to certain goals.

In general, the exchange rate plays a vital role in a country's economy, and determining appropriate exchange rate policies is vital to achieving economic stability.