Fixed exchange rate refers to the exchange rate at which the exchange rate of one country's currency to another country's currency is specified. During the gold standard period from the early 19th century to the 1930s, the international monetary system centered on the US dollar after World War II and the early 1970s implemented a fixed exchange rate system. A fixed exchange rate does not mean that the exchange rate is wholly fixed but fluctuates around a relatively fixed upper and lower parity range. For example, in the fixed exchange rate system centered on the US dollar after World War II, the official exchange rate of the currencies of the member countries of the International Monetary Fund against the US dollar is parity. The currency exchange rates of each member country can only fluctuate 1% above and below parity, and the central bank intervenes.
A floating exchange rate means that a country's currency exchange rate to another country's currency has no upper and lower limits. It is determined by the supply and demand relationship in the foreign exchange market. On August 15, 1971, the United States implemented the New Economic Policy, allowing the US dollar exchange rate to float freely. By 1973, various countries generally implemented a floating exchange rate system. The foreign exchange market continued to develop with the continuous fluctuation of different exchange rates from that time.
Floating exchange rates are divided into "free-floating exchange rates" and "managed floating exchange rates" according to whether the government intervenes. In real life, the government does not take any intervention measures in the exchange rate of its currency, and few countries fully adopt a free-floating exchange rate. Because the exchange rate has a significant impact on the country’s international balance of payments and economic equilibrium, governments in various countries mainly control the direction of the exchange rate by adjusting interest rates, buying and selling foreign exchange in the foreign exchange market, and managing capital movements.