Floating foreign exchange rates bob around on global market waters being pulled by currents of Government policy, economic fundamentals and speculative biases. The price of a currency is simply how much you can exchange it for a foreign unit, with the US dollar being the predominate benchmark. The higher your currency's rate of exchange, the richer you become on a relative basis, and vice-versa. But then, why are most countries happy for their currency to slide?
Over the past few years, the so-called "currency wars" have been heating up, with the downsides of a strong currency coming to the fore. Exporters don't like an appreciating currency as their goods become more expensive to foreigners or because they need to drop their prices to stay competitive. They much prefer a lower domestic exchange rate. Governments also prefer a weaker currency, as a depreciating exchange rate means foreign debts are serviced making repayments in a cheaper currency, plus internal demand is likely to increase with a subsequent rise in tax receipts. This push for depreciation has been seen in Australia mainly from the withering manufacturing sector, which has been hit by a high $A and higher wages rates. Overseas, most of the leading economic powers and major central banks have cited the need to either push down their own currencies or force the lifting of others, mainly to help domestic businesses improve their global competitiveness.
Some countries have tried using monetary mechanisms such as near-zero interest rates and money printing to help debase their money. The US, Eurozone, UK and Japan have all turned on the printing presses through Quantitative Easing (QE) with one of the major hopes being a depressed exchange rate. Some countries have tried diplomatic persuasion in an attempt to force other countries to act to raise their own currencies or stop intervention. The US has been earnestly complaining about the Renminbi since 2008, pleading with Chinese officials to raise the $US peg more quickly, whilst Brazil has been very vocal about the global trend towards weaker currencies. And some countries have simply gone directly to markets, hoping to sell enough domestic currency to push down rates. The Swiss National Bank and Japanese Central Bank have unsuccessfully used this approach in the recent past.
By now I'm sure you see the problem, right? As exchange rates are all relative, not everyone can depreciate at once. If one (or many) currencies fall in value, one (or many) must offset this by rising.
But Government intervention is only one part of the drivers of currency movements. The underlying economic strength and stability of a nation, and subsequent market forces such as demand and supply will also help determine whether a country's exchange rate will go up or down. Demand for a currency comes from buyers of the currency. This could be a large foreign investor buying up assets (a pension fund buying bonds, infrastructure assets, or a multinational taking over a domestic firm or building a new mine) or a foreigner buying domestic goods or services. So a large trade surplus or a large capital account surplus could lead to a spike in demand and thus, an appreciation of the currency. The opposite would also hold true.
Purchasing power parity is also a key economic fundamental which, though not particularly influential in the short-term, can help to provide information on how an exchange rate may move in the future. A simple example of this is found in the "Big Mac Index". This attempts to show currencies that are over-valued or under-valued based on how much it costs to buy a Big Mac in the respective countries. The theory being that the same product should cost the same anywhere in the world. Discrepancies should disappear over time as, if a "Big Mac" becomes too expensive in one country compared to another, the expensive country consumers will start importing these "Big Macs", thus decreasing a trade surplus (or increasing a trade deficit) and pushing the expensive currency lower.
Speculators buy and sell currencies based on beliefs about future price movements. If they think one currency is likely to appreciate against another, they will buy the one and sell the other. They also typically use derivatives markets (as opposed to "spot markets") in order to gain greater exposure to currency movements with a lesser amount of invested capital (futures, swaps, options). Though speculators do use economic information (such as trade figures and purchasing power parity) and Government policy information (such as interest rate settings and money printing), a large number of speculators will trade primarily from technical analysis (information on market trends and trading patterns).
The foreign exchange market has grown to become the largest in the world, and is much bigger for one Government or a group of speculators to influence substantially. In the end rates should move towards fundamentals based on overall economic conditions and money supply. And though the few countries not actively debasing their countries will likely have to put up with persistently higher exchange rates, at least that means residents can travel overseas and stock up on cheap Big Macs.