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What is the relationship between the balance of payments and a fixed or floating rate regime?

What is the relationship between the balance of payments and a fixed or floating rate regime?
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  • Balance of Payments and Fixed Rate Regime: The balance of payments does not impact the exchange rate in a fixed-rate system because central banks adjust currency flows to offset the international exchange of funds.
  • Balance of Payments and Free or Floating Rate Regime: A change in a country's balance of payments can cause fluctuations in the exchange rate between its currency and foreign currencies. The reverse is also true when a fluctuation in relative currency strength can alter the balance of payments. There are two different and interrelated markets at work: the market for all financial transactions on the international market (balance of payments) and the supply and demand for a specific currency (exchange rate).
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