How is the exchange rate determined in a freely floating rate system?

Question

Reading up on this for my class and I am not getting it.

Answer 1

Supply and Demand.  When currencies were valued in gold prices were pretty dependent entirely on the availability of goods.  With fiat money the real value of the currency lies in the quantity of goods and service it can purchase not vice versa.  So if you have 1 apple that costs 2 pesos and I have 1 apple that costs 1 dollar, my dollar is worth 2 pesos.  In a purely relative value sense.  Which does apply to international trade and what people in a foreign country are willing to sell us their goods in exchange for.

What happens though is interest rates and capital flows start influencing supply and demand.  So the value is never pure.  Like with the U.S. dollar being propped up by all the foreign investments held in our country and the perception of stable value in the long run.  So that's pretty much where it gets complicated and I'm not sure which you're trying to understand.