Floating exchange rate

[2] In the modern world, most of the world's currencies are floating, and include the most widely traded currencies: the United States dollar, the euro, the Swiss franc, the Indian rupee, the pound sterling, the Japanese yen, and the Australian dollar.

When a currency floats, quantities other than the exchange rate itself are used to administer monetary policy (see open-market operations).

As floating exchange rates adjust automatically, they enable a country to dampen the effect of shocks and foreign business cycles and to preempt the possibility of having a balance of payments crisis.

The debate of choosing between fixed and floating exchange rate methods is formalized by the Mundell–Fleming model, which argues that an economy (or the government) cannot simultaneously maintain a fixed exchange rate, free capital movement, and an independent monetary policy.

A system of floating exchange rates leaves monetary policymakers free to pursue other goals, such as stabilizing employment or prices.

Those economies have a financial sector with one or more of following conditions: When liabilities are denominated in foreign currencies while assets are in the local currency, unexpected depreciations of the exchange rate deteriorate bank and corporate balance sheets and threaten the stability of the domestic financial system.