What an exchange rate regime is
An exchange rate regime is the set of rules a country uses to manage the price of its currency against other currencies. The central bank or government decides how much the market may move the rate and how much the authorities will step in.
The choice affects interest rates, inflation, reserves and how sharply a currency can move. Regimes form a spectrum from fully market-driven to fully fixed:
| Regime | Who sets the rate | Main tool | Typical volatility |
|---|---|---|---|
| Free float | Market | Interest rates only | Moderate, continuous |
| Managed float | Market, with official influence | Intervention, guidance | Lower, with occasional jumps |
| Crawling peg | Authorities, adjusted gradually | Scheduled small changes | Low, predictable drift |
| Hard peg | Authorities | Reserves, interest rates | Very low until a break |
| Currency board | Law | Full reserve backing | Very low |
| Dollarisation | No local currency | None | None in local terms |
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Free float
Under a floating exchange rate, supply and demand in the currency market set the price. The central bank does not target a level. It sets interest rates for domestic goals such as inflation, and the currency adjusts.
Examples: the US dollar, euro, Japanese yen, British pound, Australian dollar and Canadian dollar are usually described as floating. Some of these central banks have intervened in rare episodes, which is covered on the currency intervention page.
How markets typically react: prices move continuously on rate decisions, inflation reports, jobs data and shifts in risk-on, risk-off mood. The size of the move depends on how far the result differs from expectations. See interest rates and currencies and the economic calendar guide for how scheduled releases are read.
Managed float
A managed float lets the market set the rate most of the time, but the central bank buys or sells currency, or uses verbal signals, to slow fast moves or lean against a trend. There is no announced fixed level, and the policy is often not fully transparent.
Examples: many emerging-market currencies fall here. China runs a managed system in which the People's Bank of China publishes a daily reference rate and allows trading within a band around it (People's Bank of China). India and several Southeast Asian economies are commonly classified as managed floats.
How markets typically react:
- Day-to-day moves are often smaller than in a free float, because the authorities smooth them.
- Traders watch reserve data, official statements and changes to the daily reference rate for signs of a new policy stance.
- When pressure builds against the official preference, the adjustment can arrive as a sudden step rather than a gradual move.
Capital controls often accompany a managed float and can create a gap between onshore and offshore prices.
Crawling peg
A crawling peg fixes the rate but adjusts it in small, regular steps, often to offset an inflation gap with trading partners. A related form, the crawling band, lets the rate move within a range that itself shifts over time.
Examples: several Latin American countries used crawling pegs in past decades. Some economies with high inflation still use crawl-like arrangements.
How markets typically react: the path is predictable, so spot moves are small. Attention shifts to the speed of the crawl, the interest-rate differential and whether reserves can support the policy. Markets react most when the authorities change the crawl rate or widen the band.
Hard peg (fixed exchange rate)
A pegged currency is held at a fixed rate against an anchor, usually the US dollar or the euro, or against a basket. The central bank defends the level by trading from its reserves and by setting interest rates to match the anchor country.
Examples: Saudi Arabia, the UAE, Qatar and other Gulf states peg to the US dollar. Denmark keeps the krone tied to the euro within a narrow range under an EU arrangement.
How markets typically react:
- Spot prices barely move in normal times.
- Stress shows up first in forward prices, in local interest rates and in reserve figures.
- If a peg breaks or is revalued, the move can be large and immediate, with price gaps. The Swiss National Bank's removal of its euro floor is a well-known case (Swiss National Bank).
A peg ties local monetary policy to the anchor's central bank. When the US Federal Reserve moves, dollar-pegged economies usually follow (US Federal Reserve).
Currency board
A currency board is a strict legal form of peg. Every unit of local money must be backed by reserves in the anchor currency, and the board issues or withdraws money only against those reserves. It cannot freely lend to the government or set independent rates.
Examples: Hong Kong's dollar is linked to the US dollar through a currency board system with a narrow convertibility range. Bulgaria operated a currency board tied to the euro.
How markets typically react: when money flows out, the monetary base shrinks automatically and local interest rates rise. Traders watch interbank rates and the board's operations at the edges of the range more than the spot rate itself.
Dollarisation
Dollarisation means a country uses a foreign currency, often the US dollar, as legal tender instead of issuing its own. Ecuador, El Salvador and Panama use the US dollar. Some small states use the euro.
There is no local exchange rate to trade. Policy credibility depends on the anchor's central bank, and the country gives up independent monetary policy. Partial dollarisation, where people hold savings in dollars alongside a local currency, is common in many economies and makes the local currency more sensitive to confidence shocks.
Pakistan and the rupee
The State Bank of Pakistan (SBP) sets the policy rate and publishes reference USD/PKR rates. The latest decision on record: SBP policy rate raised by 50 bps to 12% with effect from 27.10.2026 (MPC). How the SBP currently describes the rupee regime, and its role in the market, should be checked in its own publications. Our SBP exchange rates and SBP rates and economy pages explain where those figures come from.
Pakistani residents should also note the position on offshore trading: per the SBP, remitting foreign exchange to overseas forex/margin/CFD platforms is not allowed through any payment channel (FERA s.5(1)). See law and regulators for details.
Reading regimes as a trader
- Check the classification first. A floating pair and a pegged pair carry very different risk profiles, even if both look quiet on a chart.
- Quiet does not mean safe. Pegs can hide pressure that is released all at once. Stop orders may fill far from the set price when a price gaps.
- Use official calendars. Dates for rate decisions and reserve data come from each central bank's published calendar. Check those dates directly rather than relying on third-party summaries.
- Watch the funding side. Under pegs and boards, interest rates and the balance of payments often signal strain before the spot rate does.
Leveraged forex and CFD trading can lose money fast, and a regime change can move a price further than any normal day. Read risk management before trading any currency, and see central banks and currencies for country-specific guides.
Frequent questions
What is the difference between a floating and a pegged currency?
A floating currency's price is set by the market. A pegged currency is held at a fixed level by the authorities, who use reserves and interest rates to defend it.
Is a managed float the same as a peg?
No. A managed float has no announced fixed level. The central bank only influences the pace or direction of moves, while a peg commits to a specific rate.
Why do pegged currencies sometimes move suddenly?
If reserves run low or the cost of defending the peg becomes too high, the authorities may devalue or drop the peg. The adjustment then happens in one step instead of gradually.
How is a currency board stricter than a normal peg?
A currency board must back all local money with anchor-currency reserves by law. This leaves little room for discretionary policy.
Where can I find official exchange rate data for Pakistan?
The State Bank of Pakistan publishes reference USD/PKR rates. Our SBP exchange rates page explains them, and the trading glossary defines the terms used.
