What term describes an exchange rate determined by supply and demand in the foreign exchange market?

An exchange rate determined mainly by supply and demand in the foreign-exchange market is a floating exchange rate.

In a floating regime, the price of one currency relative to another responds to factors such as interest rates, inflation expectations, trade flows, economic growth, political events, and investor demand. Unlike a fixed rate, it is not maintained at a permanently announced value against an anchor currency. A currency can therefore appreciate when demand rises or depreciate when demand falls.

Most major currencies use floating or managed-floating arrangements. The U.S. dollar, euro, Japanese yen, pound sterling, and Australian dollar are prominent examples. “Floating” does not necessarily mean that a central bank never intervenes: authorities may buy or sell currency during periods of disorder or excessive volatility. This is often called a managed float.

The modern shift toward widespread floating followed the breakdown of the Bretton Woods system. Floating rates can absorb external economic shocks and preserve monetary-policy independence, but their variability creates uncertainty for importers, exporters, travelers, and companies with foreign-currency debts.