Dirty Float

Dirty float or managed float are terms that describe a foreign currency system in which a central bank intervenes in the foreign exchange markets to influence the balance of supply and demand, aiming to reduce the volatility of a particular currency.

The interventions by central banks are intended to mitigate the effects of economic shocks or speculative attacks that could lead to significant fluctuations in exchange rates, which may have severe consequences for domestic economies.

For many years, the currencies of major industrialized nations operated under a fixed exchange rate system, which began to shift in the 1980s and 90s with the rise of trade liberalization and globalization.

Currently, most developed countries have officially adopted free-floating exchange rates, although their central banks occasionally intervene in the forex market to manage that floatability.

These interventions, aimed at safeguarding economic stability, often yield positive outcomes for international businesses by reducing their currency risk.

For instance, the Swiss National Bank (SNB) established a “currency floor” of 1.20 in the EURCHF to prevent excessive appreciation of the Swiss franc against the currencies of its main trading partners in the EU.

An increase in the value of the Swiss franc could undermine the competitiveness of Swiss exports.

In January 2005, after years of market operations to uphold that limit, the SNB unexpectedly decided to abandon the 1.20 floor, resulting in a significant devaluation of the euro.