What Is a Clean Float?

A clean float, also known as a pure exchange rate, is a situation in which the value of currency in terms of the rate of exchange is based on what is happening in terms of the supply and demand for that currency. A situation of this type is related to economic conditions in which a government does not have a great deal of influence on the upward or downward movement of that exchange rate. One school of thought holds that a truly clean float can only exist in an economy that is totally capitalistic in nature, with no government laws or regulations interfering with the way companies do business.

The concept of the clean float is the opposite of what is known as a dirty float. With the former, there is little to no governmental intervention that causes the exchange rate on currency to move upward or downward. The latter represents a situation in which the series of laws and regulations implemented and enforced by a government are routinely used to determine the direction that the rate of exchange takes.

Many of the currencies used in the world market are considered to be somewhat less than a clean float. The general idea is that rates of exchange that are influenced less by governmental regulations are somewhat cleaner, or more influenced by supply and demand, while currencies associated with nations that have a comprehensive listing of laws and regulations that impact the rate of exchange are seen as being grayer or dirtier. While claims that certain currencies are in fact clean, the fact is that the currencies of most nations are impacted by at least a few regulations, which tends to make them less pure or clean.

There is some debate as to whether a clean float is necessarily the best approach to the exchange rate. One approach holds that without at least some support from a national or central bank, the rate of exchange would most likely suffer when misinformation about a particular currency is introduced and investors act solely on that data. If the currency is supported by a federal or central bank, the degree of influence that supply and demand has on the value of the currency can be somewhat contained, making it easier to prevent or at least slow down devaluation that leaves the economy in a crisis state. A different approach holds that government intervention on the rate of exchange ultimately does more harm than good, and that markets are capable of balancing themselves when given the opportunity.