What is a fixed exchange rate system?

A fixed exchange rate system is also called a pegged exchange rate system. The main aim of using this rating system is to keep the fluctuations of the currency within a narrow range. Following this type of system provides stability to the exporters and importers. It also assists the government in maintaining a steady inflation rate.

What is a floating exchange rate system?

Countries that have a floating exchange rate system intervene from time to time in the currency market in an effort to raise or lower the price of their own currency. Typically, the purpose of such intervention is to prevent sudden large swings in the value of a nation’s currency.

How does a fixed exchange rate affect currency speculators?

A fixed exchange rate can make a country's currency a target for speculators. They can short the currency, artificially driving its value down. That forces the country's central bank to convert its foreign exchange, so it can prop up its currency's value. If it doesn't have enough foreign currency on hand, it will have to raise interest rates.