Exchange rates look like simple numbers in a JSON response, but each one is the outcome of an enormous market and of policy decisions by central banks. You do not need to be an economist to build currency features – yet understanding how exchange rates are determined helps you explain sudden jumps in a chart, choose sensible refresh intervals, and design for currencies that behave very differently from the euro or dollar.
Exchange rates are determined by supply and demand for currencies in the foreign exchange market, within the framework set by each country’s exchange rate regime. Floating currencies move freely with trade, investment flows and expectations about interest rates and inflation; pegged and managed currencies are held at or near a target by their central bank.
Educational content only. This page explains general concepts. It is not investment, trading or financial advice, and nothing here predicts future exchange rates.
The foreign exchange market
The FX market is the largest financial market in the world. According to the Bank for International Settlements’ 2025 Triennial Survey, over-the-counter FX trading averaged $9.6 trillion per day in April 2025, and the US dollar was on one side of 89.2% of all trades. Trading is concentrated in a few centers – the UK, the US, Singapore and Hong Kong account for most of it – and runs around the clock on weekdays.
There is no central exchange. Banks, dealers, asset managers, corporations and central banks trade directly or through electronic platforms, and every price is a bid and an ask. The mid-market rate – the midpoint between them – is what reference-rate data such as fxapi reports.
Exchange rate regimes: floating, pegged and managed
How much a currency moves depends first on the regime its authorities choose. The IMF classifies arrangements in its Annual Report on Exchange Arrangements and Exchange Restrictions; simplified, they fall into three families:
| Regime | How the rate is set | Examples | What you see in the data |
|---|---|---|---|
| Floating | Market supply and demand; intervention rare or limited | USD, EUR, JPY, GBP | Continuous movement, occasionally sharp |
| Soft peg / managed | Central bank targets a fixed rate, band or crawl and intervenes to hold it | DKK in ERM II, XAF/XOF fixed to the euro, crawling pegs | Small moves within limits, occasional step changes |
| Hard peg | Currency board or no separate legal tender | HKD (currency board) | Almost flat against the anchor, moves with it against others |
A pegged currency is only flat against its anchor. The Hong Kong dollar barely moves against the US dollar, so against the euro it moves roughly as much as the US dollar does. Keep this in mind when you display a “change” for pegged currencies – the base currency you choose determines whether the line is flat. See base currency and cross rates.
How floating exchange rates are determined
For floating currencies, these forces shape supply and demand. None of them works in isolation, and markets react to expectations as much as to published numbers.
Interest rates and monetary policy
Higher interest rates make deposits and bonds in a currency more attractive to foreign investors, which tends to raise demand for it, all else equal. Central bank decisions – and, even more, changes in what markets expect them to decide – are among the most watched drivers of currency moves.
Inflation and purchasing power
Over long periods, currencies of countries with persistently higher inflation tend to weaken against those with lower inflation, because each unit buys less. This is the idea behind purchasing power parity. It describes long-run tendencies, not short-term moves.
Trade and the current account
Exporters convert foreign earnings into their home currency; importers sell their home currency to pay suppliers. A country with a persistent current account surplus sees structural demand for its currency, a deficit country the opposite – although capital flows can offset either.
Capital flows and risk sentiment
Investment flows – into equities, bonds, companies – are far larger than trade flows. In periods of stress, investors often move into currencies seen as safe havens, a pattern associated with the US dollar, the Swiss franc and the Japanese yen.
Central bank intervention
Central banks can buy or sell their own currency directly. Under a peg this is the main tool; under a float it is used occasionally to counter what authorities see as disorderly moves.
Politics and institutions
Elections, fiscal policy, sanctions, capital controls and confidence in institutions influence how much investors are willing to hold a currency.
Three real-world examples
Hong Kong dollar: a currency board peg
Hong Kong has operated the Linked Exchange Rate System since 17 October 1983, originally at HK$7.80 per US dollar. Since refinements announced in May 2005, the Hong Kong Monetary Authority stands ready to buy US dollars at 7.75 and sell them at 7.85. That is why HKD/USD data since 2005 moves only within this narrow band. More on the Hong Kong dollar.
Danish krone: managed against the euro in ERM II
Denmark has participated in the EU’s Exchange Rate Mechanism II since the euro’s introduction in 1999. Danmarks Nationalbank targets a central rate of 746.038 kroner per 100 euros, with a fluctuation band of ±2.25% – narrower than ERM II’s standard ±15%. Its main tools are interest rates and intervention. See the Danish krone.
Swiss franc: the end of a floor in 2015
On 6 September 2011, the Swiss National Bank set a minimum exchange rate of CHF 1.20 per euro in response to what it described as an exceptional overvaluation of the franc. On 15 January 2015, the SNB discontinued the minimum rate and at the same time lowered the interest rate on sight deposit balances to –0.75%. The franc appreciated sharply that day – a reminder that a policy-held rate can change abruptly when the policy changes. See the Swiss franc.
What this means for your application
- Expect jumps. Floating currencies can move several percent in a day after policy surprises; pegged currencies can reset in one step. Build alerts on percentage change, not on fixed thresholds.
- Store history. When a number looks wrong, the first question is “what was the rate then?” – keep the timestamp and rate with each converted amount, and use historical exchange rates to check.
- Mind exchange controls. Some currencies have official and parallel rates or restricted convertibility. A reference rate may not be the rate at which money can actually move.
- Don’t forecast with reference data alone. Rate APIs tell you what happened, not what will happen.
Example: compare how regimes behave with fxapi
/v1/fluctuation returns the start rate, end rate, absolute change and change_pct for each currency between two dates, on every plan. Compare a pegged, a managed and a floating currency against the US dollar for 2025:
curl -G "https://api.fxapi.com/v1/fluctuation" \
-d base_currency=USD \
-d currencies=HKD,DKK,CHF,JPY \
-d date_from=2025-01-01 \
-d date_to=2025-12-31 \
-H "apikey: $FXAPI_KEY"
Expect HKD to show a very small change_pct against USD, DKK to move almost exactly like EUR, and CHF and JPY to move freely. Run the same request with base_currency=EUR and DKK flattens while HKD starts moving. For charts, the currency fluctuation API and time series API pages show further options.
Key takeaways
- Most exchange rates are set by supply and demand in a decentralized, around-the-clock market.
- The regime – floating, managed or pegged – decides how much a currency can move and against what.
- Interest rates, inflation, trade, capital flows, intervention and politics drive floating currencies, mostly through expectations.
- Real-world pegs and floors (HKD, DKK, CHF) show both stability and the risk of sudden change. For the data side, read what is an exchange rate API.
Want to try it? fxapi is a foreign exchange rates API that returns live and historical rates for 190+ currencies as JSON – free for up to 300 requests a month.