On the premise of stabilizing the currency, the central bank can enter the market to buy and sell foreign exchange to maintain a reasonable and relatively stable exchange rate. The difference between it and the free floating exchange rate is that it is managed by macro-control, that is, the monetary authorities announce the exchange rate according to the price formed in the foreign exchange market, allowing it to float up and down within the prescribed floating range.
Advantages of floating exchange rate system
(1) can prevent the impact of a large amount of hot money on hard currency in the international financial market.
Under the floating exchange rate system, the exchange rate is basically determined by the relationship between supply and demand in the foreign exchange market. Compared with the exchange rate formed by government intervention under the fixed exchange rate system, it is more in line with the actual value of the currency, so it is no longer quite sure which currency is soft or hard, which can reduce the possibility of currency being hit.
(2) It can prevent some countries from losing their foreign exchange reserves and gold.
Under the fixed exchange rate system, when a country's currency is sold in the international market, because the country has the responsibility to keep the exchange rate fluctuating within the prescribed limits, it must use its foreign exchange gold reserves to buy its own currency and intervene in exchange rate changes, which will cause a lot of losses to its foreign exchange gold reserves. Under the floating exchange rate system, countries have no obligation to maintain the stability of their own exchange rates, so there will be no large loss of foreign exchange gold reserves due to forced intervention in exchange rates.