A floating exchange rate system is a type of currency exchange mechanism where the value of a currency is determined by market forces, such as supply and demand. In this system, currencies can fluctuate freely against one another, allowing for changes based on economic conditions, interest rates, and geopolitical events. Countries that adopt a floating exchange rate do not intervene directly in the currency market to stabilize their currency's value. Instead, they allow the market to dictate the exchange rates, which can lead to greater volatility but also reflects the true economic situation of a country, such as inflation and trade balances.