Definition – What does Dirty Float mean?
A dirty float occurs when a country’s central bank attempts to influence the value of its currency by selling or buying large amounts in the forex market. A dirty float is in contrast to a true floating rate system where the market participants decide the value without interference from the nations issuing the currency. Almost every country in the world uses a dirty float. A dirty float is also known as a managed float.
ForexTerms explains Dirty Float
The dirty float represents the real way the currency markets work. As the exchange rate of a country’s currency affects its bottom line in terms of the income from exports and the cost of imports, very few countries are willing to leave it to chance. Countries defend the dirty float as a protective measure against traders, hedge funds and currency speculators who try to move a country’s currency in a direction the government doesn’t agree with. Hedge funds and currency speculators retort that trading wouldn’t be required to bring down overvalued currencies or push up unfairly undervalued currencies if countries quit using their dirty floats to interfere with market signals. So it goes.