What characterizes a floating exchange rate?

A floating exchange rate is characterized by its ability to move freely in the foreign exchange market. This means that the value of the currency is determined by market forces, primarily supply and demand, rather than being fixed or pegged to another currency or controlled by government intervention.

In a floating exchange rate system, the currency can appreciate or depreciate against other currencies based on various economic factors, including interest rates, inflation, and economic indicators, allowing for greater flexibility and responsiveness to market conditions. This system contrasts with fixed or pegged exchange rates, where a currency's value is tied to another currency or a basket of currencies, limiting its ability to fluctuate freely.