Foreign Exchange Rate

The foreign exchange rates or Forex rate or FX rate between two currencies specifies how much one currency is worth in terms of the other. For example $1 is worth same as Rs. 50. If a currency appreciates with respect to the other currency it means the former can buy more of the latter i.e. if Dollar appreciates w.r.t. Rupees, it means $1 will buy more than Rs. 50 in the market. This also means that dollar has become stronger w.r.t Indian rupees. Currencies are traded in foreign exchange market, which is the largest and most liquid financial market in the world, and includes trading between large banks, central banks, currency speculators, corporations, governments, and other institutions.
Types of exchange ratesThere are two types of exchange rate: Fixed exchange rate and Free-floating rate. A fixed exchange rate is a type of exchange rate regime wherein a currency\'s value is matched to the value of another single currency or to a basket of other currencies. For example China and Malaysia have pegged their currencies to US Dollar. A fixed exchange rate is usually used to stabilize the value of a currency, vis-a-vis the currency it is pegged to. This facilitates trade and investments between the two countries, and is especially useful for economies where external trade forms a large part of their GDP.
A free-floating exchange rate is determined by market forces of demand and supply and varies constantly in the market. India has a free-float FX rate where rupee varies almost everyday w.r.t. other leading currencies.
Volatility in exchange rateCurrency value is largely determined by macroeconomic situation such as inflation, interest rates and microeconomics factors such as demand and supply.
If the demand for a currency (X) w.r.t some the other currency (Y) is high, value of X appreciates w.r.t that of Y. Consider the case of US dollar and Indian rupees. A year back the conversion was 1$=Rs. 39 and now it is 1$=Rs. 49. This shows that dollar has appreciated w.r.t rupees or has become stronger. This happened because during the last few months there has been huge demand for dollars in Indian market. Foreign investors are heavily selling their investments (which were in rupees) in India and hence, creating huge demand for dollars (because they have to convert rupees to dollars so that they could take that back to the US). This has led to appreciation of US dollar while lower demand and excess supply of Indian rupees has led to its depreciation.
Interest rates in a country can also affect the currency value. Interest rate in India is very high compare to other developed economy such as US and Japan. So investors in these countries may want to invest their money in India to get higher returns. To invest in India they have to buy Rupees and invest in companies or equities or debt. This leads to high demand for rupees and hence, rupee appreciates w.r.t US dollar. However, currently there is less demand for Indian equities and more dollars are moving out of Indian economy. Hence, we see higher depreciation of rupees w.r.t. dollars. Interest rates vary from one country to another because of different economic growth and inflation.