In foreign exchange terminology, a currency band sets both an upper range limit and a lower range limit for the foreign exchange rate of the currency pair involved. The band therefore limits how much one currency can fluctuate or float relative to another currency, or even a set of currencies in some cases.Often, the band will be expressed in percentage terms around a central target level for the exchange rate.
Currency bands are often used by countries that wish to maintain a relatively stable exchange rate relationship between their currency and that of another major trading partner. Currency bands offer a more flexible alternative to a currency peg or fixed exchange rate, and often such currency bands will be defended using currency market intervention by the central bank of one or more of the countries involved. The Chinese Yuan is one example of a currency that trades in a currency band relative to the U.S. Dollar and some other currencies.