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Dirty Float

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Dirty float or managed float are two terms that refer to a foreign currency regime by which a central bank intervenes in the foreign exchange markets to manipulate the balance of supply and demand in order to curb the volatility of a specific currency.

Central bank interventions aim to avoid the consequences of economic shocks or speculative attacks that might cause wild fluctuations in the exchange rate with potentially disastrous implications for domestic economies.

For decades, the currencies of the major industrialized countries had a fixed exchange rate system, which was gradually opened up in the 1980s and 90s with the advent of trade liberalization and globalization.

Now, the currencies of most of the developed countries have free-floating rates officially, although their central banks occasionally take action in the forex market to limit that floatability.

These actions aiming to protect economic stability tend to have advantageous consequences for international companies, as they limit their currency risk.

For example, the Swiss National Bank (SNB) maintained a “currency floor” of 1.20 in the EURCHF to avoid excessive appreciation of the Swiss franc against the currency of its primary trade partners in the EU.

Currency appreciation of the Swiss franc would damage the competitiveness of Swiss exports.

In January 2005, after years of market operations to defend that limit, the SNB decided to abandon the 1.20 floor without prior notice, triggering a massive euro devaluation.

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