Free floating

The value of the currency is determined solely by supply and demand in the foreign exchange market. Consequently, trade flows and capital flows are the main factors affecting the exchange rate.

The definition of a floating exchange rate system is a monetary system in which exchange rates are allowed to move due to market forces without intervention by national governments. The bank of England, for example, does not actively intervene in the currency markets to acheive a desired exchange rate level.

with floating exchange rates, changes in market supply and demand cause a currency to change in value. Pure free floating exchange rates are rare - most governments at one time or another seek to "manage" the value of their currency through changes in interest rates and other means of controls.

Managed floating exchange rates

Most governments engage in managed floating systems, if not part of a fixed exchange rate system.