Exchange-rate System

A set of rules that determine the international value of a currency. An exchange-rate system is the way an authority manages its currency in relation to other currencies and the foreign exchange market.

There are three major categories of exchange rate systems. A floating exchange rate system allows the market to dictate movements in the exchange rate. In a managed float the central bank keeps the exchange rate from deviating from a target value or band. The third category of exchange rate system is a a fixed exchange rate system, which ties the currency to another currency or a basket of currencies.