When currency exchange rates float, what determines the value of a currency?

Question

Quizplus · Accepted Answer

When currency exchange rates float, the value of a currency is determined by supply and demand. The more demand for a currency, the higher its value will be relative to other currencies. Similarly, the more supply of a currency, the lower its value will be relative to other currencies. This is affected by economic factors such as inflation, interest rates, and political stability, as well as market sentiment and speculation. The prices of gold and government currency pegs may also influence exchange rates, but ultimately it is the balance of supply and demand that determines the value of a currency. The basket of goods each unit of the currency will buy may be a factor in determining the purchasing power of a currency but not the exchange rate.

When Currency Exchange Rates Float, What Determines the Value of a Currency