Currency Adjustment Explained: 2025 Insights and Costs You Should Know

What Is Currency Adjustment?

Currency adjustment is a strategic action taken by central banks to influence the exchange rate of their domestic currency. This intervention is particularly relevant when the currency operates under a floating exchange rate system, meaning its value fluctuates based on market forces rather than being fixed to another currency.

Central banks engage in these adjustments to manage excessive short-term volatility in their currency's value, a practice known as a managed float exchange rate system. This helps stabilize the economy by preventing abrupt currency swings that could harm trade and investment.

Besides monetary policy, the term 'adjustment' also applies in other financial contexts. For example, U.S. international shippers impose a Currency Adjustment Factor (CAF) fee to mitigate risks from exchange rate fluctuations in global trade. Similarly, adjustable-rate mortgages (ARMs) feature periodic interest rate adjustments, such as a 5/1 ARM where rates are fixed for five years before adjusting annually.

Key Points to Remember

• Currency adjustment involves central bank actions to influence domestic currency exchange rates.
• Adjustments can weaken an overly strong currency to support exporters.
• The Currency Adjustment Factor (CAF) is a common surcharge used by shippers to offset exchange rate volatility.

How Central Banks Use Adjustment

Central banks intervene when currency movements become too extreme, as rapid appreciation or depreciation can disrupt economic stability. However, inconsistent or unpredictable adjustment policies may create uncertainty for investors, a scenario known as a 'dirty float' or managed exchange rate policy.

Understanding the Currency Adjustment Factor (CAF)

In international shipping, the CAF is a surcharge applied to cover losses from fluctuating currency values. For example, if the base ocean freight to Peru is $15,000 and the CAF rate is 6%, an additional $900 is charged to account for currency risks. This fee varies depending on the destination country and current exchange rates.

For U.S. shippers, the CAF increases when the U.S. dollar weakens, calculated as a percentage over the base rate derived from the average exchange rate of the previous three months. To manage these costs, many shippers now prefer all-inclusive contracts that bundle all charges into a single price, reducing exposure to CAF fluctuations.

The CAF originated to protect exporters from volatile exchange rates between Pacific Rim countries and the U.S., acting as a financial safeguard against potential currency losses during international shipments.

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