What determines exchange rates?

Standard models — interest-rate parity, purchasing power parity, monetary models — explain at most a small fraction of short-to-medium-run exchange rate variation. Meese and Rogoff's 1983 finding that exchange rates follow a near-random-walk remains essentially unbeaten.

Order-flow analysis, behavioural factors and risk premia are active areas, but no theory consistently outperforms naïve forecasts.