Title: Explaining the difference between fixed and floating exchange rates - Wise, formerly TransferWise
Headings: Explaining the difference between fixed and floating exchange rates
Explaining the difference between fixed and floating exchange rates
Wise
What is an exchange rate?
Floating (flexible) exchange rate
Supply and demand explained
International trade
Foreign investment
Interest rates
Fixed (pegged) exchange rate
Pegging
Basket peg
Manipulating market forces
The managed floating approach
Which type of exchange rate is better?
Advantages and disadvantages of a floating exchange rate
Advantages and disadvantages of a fixed exchange rate
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Content: Trade with the United States is the main source of income for many of these countries. It makes sense for them to peg their currency to the Dollar, because it ensures they’ll always get more or less the same amount of money whenever they do business. The US Dollar is also the most widely held foreign currency by Central Banks around the world, and it’s always in demand. This makes it the strongest and most powerful currency around. Many countries peg their currency to the Euro for similar reasons. Central African countries such as Cameroon, Chad and Gabon used to be European colonies; and they still do most of their business with the European Union. Pegging their currency to the Euro keeps their income at a stable level. Basket peg
Rather than pegging to one single currency, some countries with a fixed exchange rate peg their currency in a basket peg: a range of other currencies in different percentages.