Not every currency floats freely. How much a government lets the market set its currency — versus controlling it — is the currency’s regime, and it shapes how the currency behaves.
The spectrum
- Floating — the value is set purely by market supply and demand. Most major currencies (the dollar, euro, yen, pound) float. They move freely, sometimes sharply.
- Pegged (fixed) — the government fixes its currency to another, often the US dollar, and commits to defend that rate. It buys stability and trade predictability at the cost of monetary independence.
- Managed float (“dirty float”) — the in-between: mostly market-set, but the central bank nudges it when it strays too far.
Intervention
Even floating-currency central banks sometimes intervene — buying their own currency to prop it up, or selling it to hold it down — usually to calm disorderly moves. To defend a peg, a country must spend its foreign-exchange reserves: selling dollars to buy its own currency when it’s under pressure.
The danger of a peg is precisely there. If markets doubt a country can defend it, they attack — selling the currency until the reserves run dry and the peg breaks, often violently (currency crises are usually broken pegs). Intervention can steer a currency for a while, but it can’t override a determined market forever.
The takeaway
Currencies sit on a spectrum: floating (market-set), pegged (fixed and defended), or a managed float in between. Central banks intervene — and spend reserves to defend pegs — but markets can overwhelm a peg, which is how currency crises happen. (This is education, not investment advice.)