Ups and Downs in Exchange Rates

A market based exchange rate will change when the value of each of the two component currencies change. A currency will tend to be more valuable when the need is greater than the available supply. There will be less valuable when demand is less than available supply (this does not mean that people no longer want money, it just means they prefer holding their wealth in some other form, possibly another currency).

Increased demand for a currency due to either increased transaction demand for money, or an increased speculative demand for money. The transaction demand for money is highly correlated to the countries level of business activity, gross domestic product (GDP) and employment. The more people there are out of work, the less the public as a whole spend on goods and services. Central banks typically have little difficulty adjusting the available money supply to accommodate changes in demand for money due to business transactions.