Why do exchange rates change?

Exchange rates move constantly because a currency's price reflects supply and demand for it. Several forces drive that demand:

• Interest rates. Higher rates tend to attract capital, raising demand for a currency. Central-bank rate decisions are among the biggest single movers.
• Inflation. Persistently high inflation erodes purchasing power and usually weakens a currency over time.
• Trade balances. Countries that export more than they import see steady demand for their currency.
• Political and economic stability. Investors favour stable economies, which is why "safe-haven" currencies strengthen during turmoil.
• Market sentiment and speculation. Expectations about all of the above move rates before the events even happen.

Most major currencies "float" — their value is set by markets. Some are "pegged" or managed against another currency or a basket, which limits how far they move.