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Floating exchange rate is considered one of the major regimes of exchange rate. This regime allowed the currency to fluctuate depending on the supply and demand of currency in the foreign exchange rate market, without any government intervention through the central bank. Additionally, the floating exchange rate extends from a free floating to a managed floating. In reality, the governments utilize a mix of regimes to allow them for intervention when occurring the financial crisis or to achieve economic recovery.
As for the nexus between interest rates and floating exchange rate, the interest rate is one of the determinants or influencing factors of exchange rates. Furthermore, any increase or decrease in interest rates leads to change up or down in the demand for goods and services and financial assets of this state, which increases the demand for the currency. Hence, the exchange rates change according to the change in demand for the currency, as we pointed out earlier that the floating exchange rate is based on supply and demand for the currency.
Noted: I have prepared master's thesis on "The Nexus between Exchange Rate Regimes and Economic Growth and The Impact of Volatility Oil Prices on Both of Them in Saudi Arabia.
