A market-based exchange rate will change whenever the value of currencies change.

A currency will tend to become more valuable whenever demand for it is greater than the available supply and it will become less valuable whenever demand is less than available supply.

This does not mean 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 is due to either an increased ‘transaction demand’ for money, or an increased ‘speculative demand’ for money.

The transaction demand for money is related to the country’s level of business activity, gross domestic product and employment levels. The more people there are out of work, the less the public as a whole will spend on goods and services.

The speculative demand for money is much harder for a central bank to accommodate, but it will try to do this by adjusting interest rates. Investors will choose to buy a currency if the return (that is, the interest rate) is high enough. The higher a country's interest rates, the greater the demand for that currency.