Fixed vs floating exchange rates (and how each impacts FX risk)

If you're managing cross-border payments in multiple currencies, each currency's exchange rate regime shapes your FX exposure differently.

A payment in euros behaves differently from one in Chinese yuan — not because of the amount, but because of how each currency's value gets determined.

In this guide, we'll cover what fixed and floating exchange rates mean specifically for international payments, how each regime affects your risk profile, and what you can do to manage that exposure.

What fixed and floating actually mean for international payments

Before getting into the specifics, it's worth establishing what these terms mean in the context of international business operations and cross-border payments — not academic economics or consumer lending.

What are floating exchange rates?

A floating exchange rate, also called a flexible exchange rate, moves freely based on supply and demand in the foreign exchange market.

There's no central bank target and no intervention to maintain a specific level. The rate fluctuates continuously based on trade flows, interest rate differentials, investor sentiment, and macroeconomic conditions.

For finance teams, this means the EUR/USD rate you quote on Monday could shift meaningfully by Friday. That movement directly affects your payment costs, receivables value, and margin predictability.

What are fixed exchange rates?

A fixed exchange rate, also called a pegged exchange rate, is one where a country's central bank commits to maintaining its currency at a set value against another currency or basket of currencies.

To hold the peg, the central bank actively intervenes in the market, buying or selling its own currency to keep the rate within a narrow band around that target.

For finance teams, this means the rate you see today for a pegged currency is likely to be similar tomorrow. But that stability depends entirely on the central bank's ability — and willingness — to defend the peg.

Floating exchange rates: How most major currencies work

The currencies you're most likely dealing with, like EUR, USD, GBP, JPY, all operate under floating regimes, though with varying degrees of central bank involvement.

This wasn't always the case though. Until the early 1970s, most major economies pegged their currencies to the US dollar. But maintaining those pegs proved unsustainable, and one by one, countries let their currencies float.

The shift stuck because floating rates offer something fixed regimes can't: monetary policy independence. Central banks can adjust interest rates based on domestic conditions without worrying about defending a peg. For open economies with deep capital markets, that flexibility outweighs the cost of currency volatility.

That said, "floating" doesn't mean "hands-off." Even in floating regimes, central banks intervene occasionally — especially during periods of extreme volatility — to prevent sharp overvaluation or undervaluation. Pure, unmanaged floats are rare in practice.

Fixed exchange rates: Pegged currencies and what holds them in place

Fixed exchange rate regimes were the global standard for much of the 20th century. After the Bretton Woods Agreement of 1944, major currencies were pegged to the US dollar, which was itself backed by gold.

The system worked — until it didn't. By the early 1970s, the US ended dollar-gold convertibility, and most developed economies shifted to floating rates.

So why do some countries still peg their currency?

For smaller or emerging economies, a fixed rate can anchor inflation expectations and attract foreign investment. It signals stability — as long as the central bank has the reserves to back it up.

Today, fixed or heavily managed pegs are less common but still exist. For example, the Hong Kong dollar remains pegged to the US dollar, as do several Gulf currencies including the Saudi riyal and UAE dirham. These pegs provide day-to-day stability, but they require constant defence — and that defence is only as strong as the central bank's foreign currency reserves.

How each exchange rate regime type shapes your FX risk profile

Understanding the regime is one thing. Understanding how it affects your exposure — and what you can do about it — is what actually matters for treasury operations.

Floating currencies: Volatility you can see coming

With floating currencies, volatility is the norm — but it's volatility you can track, model, and build into your forecasts.

The EUR/USD pair might move 5–10% over a year, and that movement is visible in real time. You can monitor trends, set alerts, and time conversions when rates are favourable.

The risk is continuous, but predictable in its unpredictability. Tools like forward payment contracts let you lock in rates and remove the guesswork from future payments. Your FX exposure is transparent — you know you have it, and you can manage it proactively.

Fixed currencies: Stability until it isn't

Fixed rates offer day-to-day stability, but that stability masks a different kind of risk — sudden, dramatic adjustment when the peg breaks.

Central banks can only defend a peg as long as their reserves hold out. When pressure mounts from trade imbalances, inflation differentials, or speculative attacks, the adjustment can be swift and severe. The 1997 Thai baht collapse, Argentina's 2001 peso crisis, and Egypt's recent pound devaluations all followed this pattern.

For businesses, this means a currency that looked stable for years can move dramatically when the central bank capitulates. For example, when Egypt floated their pound in March 2024, the currency lost nearly 40% of its value within hours.

A fixed exchange rate doesn't mean the risk is absent — it means it's concentrated into rare but severe events that are harder to anticipate.

What this means for your cross-border payment strategy

Whether you're paying suppliers in a floating currency like EUR or receiving payments in a managed currency like CNY, FX exposure is part of operating internationally. The regime type affects the character of your risk (gradual drift vs sudden shock) but it doesn't eliminate it.

That’s where specialised FX risk management and cross-border payments providers like iBanFirst come into play.

With iBanFirst, you can:

• Lock in exchange rates for future payments using three types of forward payment contracts — fixed, flexible and dynamic
• Hold funds in 25+ currencies through a multi-currency account, reducing the need to constantly convert back to your home currency
• Access FX specialists directly when you need guidance on complex payment corridors

The goal isn't to predict where currencies will move. It's to build a payment infrastructure that gives you cost predictability and operational control — regardless of market conditions.

If you’re curious how iBanFirst could potentially fit for your business, request an account today and we’ll walk you through how it all works — tailored to your specific business.

Frequently asked questions about fixed and floating exchange rates

These are some of the most common questions we hear from finance teams navigating FX exposure across different currency regimes.

Does the UK have a fixed or floating exchange rate?

The British pound operates under a floating exchange rate regime — its value is determined by supply and demand on the foreign exchange market. The Bank of England doesn't target a specific exchange rate, though it may intervene in extreme circumstances to stabilise markets.

For businesses paying UK suppliers or receiving GBP revenue, this means the EUR/GBP or USD/GBP rate will fluctuate continuously.

Does China have a fixed or floating exchange rate?

China operates a managed float — officially called a "managed floating exchange rate based on market supply and demand." The People's Bank of China sets a daily reference rate for the yuan (CNY) and allows trading within a 2% band around that rate.

In practice, the CNY is more stable than fully floating currencies but still moves — and the reference rate itself can shift based on policy decisions. For businesses trading with Chinese suppliers, CNY exposure sits somewhere between floating volatility and fixed-rate stability.

Which exchange rate system is most common today?

Floating exchange rates are the dominant system globally. Most major economies — including the US, Eurozone, UK, Japan, Australia, and Canada — let their currencies float.

Fixed or heavily managed rates are more common in smaller economies, commodity-dependent countries, or nations seeking to stabilise inflation. The shift happened after the Bretton Woods system collapsed in the early 1970s, and the trend toward flexibility has continued since.