Exchange Rate Dynamics is an economic concept describing the continuous movement and fluctuation of the exchange rate, which is the price of one national currency expressed in terms of another. The concept evolved from the rigid Gold Standard, which was widely adopted around 1870–1914 and pegged currencies to a fixed amount of gold. This was replaced by the Bretton Woods system, established in 1944, which fixed other currencies to the US dollar, which was itself convertible to gold. This system largely ended around 1971, leading to the current era of mostly floating exchange rates determined by market forces.
The mechanism works through the interplay of supply and demand for a currency in the foreign exchange market. The dynamics are influenced by macroeconomic factors such as differentials in interest rates and inflation, the current account balance, and a country's terms of trade. In the short term, however, factors like order flow, speculation, and Central Bank intervention are often more influential than long-term macroeconomic fundamentals. The concept connects to theoretical models like Purchasing Power Parity (PPP) and Interest Rate Parity (IRP). For India, the major change occurred in 1993, when the regime officially shifted from a fixed peg to a market-determined exchange rate, though the Reserve Bank of India (RBI) continues to intervene to manage volatility.