A currency’s price is just supply and demand — but what drives that demand? A handful of forces explain most of it.
Interest rates
The single biggest lever. When a country’s interest rates rise (or are expected to), global money flows in chasing the better return, lifting demand for its currency. So higher rates tend to strengthen a currency; cuts tend to weaken it. (This is so central it gets its own lesson in the next tier.)
Inflation
High inflation erodes what a currency buys, so over time it tends to weaken — each unit is worth less in real goods. Stable, low inflation supports a currency’s value.
Trade and flows
A country that exports more than it imports has foreigners constantly buying its currency to pay for those goods — supporting demand. Big trade deficits can weigh the other way. Investment flows (foreigners buying its stocks and bonds) push the same levers.
Sentiment and safety
In calm times money chases yield; in a panic it flees to safe-haven currencies (historically the US dollar, Swiss franc, yen). So risk sentiment can move rates sharply, regardless of the economic fundamentals.
Appreciation vs depreciation
When a currency strengthens it’s said to appreciate; when it weakens, to depreciate. These are the words you’ll see — and every force above tugs one way or the other.
The takeaway
Exchange rates move on interest rates (higher → stronger), inflation (higher → weaker), trade and investment flows, and sentiment (safe-haven demand in a panic). A strengthening currency appreciates; a weakening one depreciates. (This is education, not investment advice.)