Floating Exchange Rate
Plain definition
An exchange-rate system in which a currency's value is set by supply and demand in the foreign-exchange market, with no official target. The US dollar, euro, and yen all float.
In economics
Floating rates absorb external shocks automatically: a trade deficit pushes the currency down, which then boosts exports. But floating rates expose importers and exporters to volatility, which firms hedge with forward contracts. Most major economies float, sometimes with occasional 'dirty float' intervention.
Example
The dollar-yen rate moves daily with interest-rate expectations and trade news -- no government announces a target, and the market clears at whatever price balances buyers and sellers.
Floating does not mean completely unmanaged. Many central banks run 'dirty floats,' intervening to smooth sharp moves -- a managed float. The confusion matters on exams: pure laissez-faire floating is rarer than managed floating in practice.