What are the dominant mechanisms in currency price-level fluctuations?

Question

and what are the currencies of the worlds major economies pegged to? what series of dynamics leads to an increase or decrease?

I would appreciate a more detailed answer than the simple functions of central banks. if you have any links that give insight as to the economics of currencies I'd really appreciate it.

I find movements in currency price levels somewhat of an enigma.

How do hedge funds and major investment and financial institutions fit into the movement of a currency?

how does the domestic and global milieu fit into it?

thanks in advance- much respect to the economists (by formal education or life experience) out there.

Answer 1

Everyone finds currency price movements an enigma, even the professional currency traders. (Have you noticed the number that have lost bundles recently?)

The dominant mechanism is speculation. Far more money is involved in speculation per se than in hedging for future expenditures and revenues, etc.:

http://www.ny.frb.org/research/epr/04v10...

http://papers.ssrn.com/sol3/papers.cfm?a...

Speculators would argue that the dominant mechanisms are government policies that out of line with economic realities:

http://www.fpif.org/briefs/vol4/v4n17cap...

http://www.brookesnews.com/george-soros....

Of the big four, three of the currencies are not pegged: the U.S. dollar, the Euro, and the Yen. The Chinese renminbi is pegged:

http://en.wikipedia.org/wiki/Renminbi

Some have argued (including the fpif paper cited above) that letting a currency float free is asking for trouble, particularly for a small economy. On the other hand, trying to control the exchange rate has, historically, been too hard for any government to do effectively for any length of time - political considerations (pride, special interest groups, etc.) tend to dominate over economic.