When the foreign exchange market determines the relative value of a currency in a country, that country is using a floating exchange rate regime.
A floating exchange rate system is one where a country's currency price is decided by the foreign exchange market depending on the specific supply and demand of all other currencies. In contrast to a fixed exchange rate, a floating exchange rate is not constrained by trade restrictions or governmental oversight.
Fluctuating exchange rate system in an open market determines the price considering speculation, along with supply and demand factors. Because of floating exchange rate structures, shifts in long-term currency prices reflect relative economic strength and variations in interest rates between nations. Changes in the short-term floating exchange rate reflect catastrophes, speculative activity and the currency's daily supply and demand.
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