A dirty float is an exchange rate system where a currency's value is influenced by both market demand and government intervention. The document explains how exchange rates are determined and how government actions can stabilize currency values during economic distress. It highlights the significance of understanding demand and supply dynamics in relation to currency valuation.

1. By:-
eFinanceManagement.com
https://efinancemanagement.com/international-financial-management/dirty-float
Dirty Float

2. 1. Meaning
2. Exchange Rate & Exchange Rate System
3. How Demand and Supply affect Exchange Rate?
4. How do Government Interfere in Dirty Float?
5. Need of Government Intervention
6. Reference
Content

3. An exchange rate system in which the value of a currency is determined not only by the forces of demand and supply but
also through some form of intervention by the central government or central banking regulator of that country is known
as dirty float.
Meaning

4. Exchange Rate:
An exchange rate is nothing but the value of one country’s currency in relation to another country’s currency. For
example, how many dollars a US resident has to pay in order to get one Japanese Yen is determined by these exchange
rates.
Exchange Rate System:
An exchange rate system means how does a country want the exchange rate of its currency to be determined. There are
majorly three exchange rate systems countries use to determine their currency’s exchange rate.
1. Fixed exchange rate
2. Floating exchange rate
3. Dirty float
Exchange Rate & Exchange Rate System

5. The impact of demand and supply of the currency also follows the universal law of demand and supply. If the demand
for a particular currency is higher (by tourists, businesses, etc.) than its supply, its exchange rate will rise. Similarly, if the
demand is lower than the supply, the exchange rate of that currency will fall. This rise and fall in the exchange rate are not
for one time.
How Demand and Supply affect Exchange Rate?

6. Under dirty float, the government or the central bank of a country intervenes to change the equation of demand and
supply. This intervention leads to an artificial or controlled change in demand and/or supply of the currency. For
example, when the government of a country buys its own currency from the foreign exchange market, it is creating
additional demand for its currency.
How do Government Interfere in Dirty Float?

7. Government intervention becomes necessary under extreme situations such as a natural disaster destroying large parts of
the country or a major terrorist attack. These situations will call for heavy selling by investors who invest in foreign
exchange. Governments interfere in these times to stop the currency value from falling and to restore it.
Need of Government Intervention

8. Reference
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