A currency is a shared agreement to accept a piece of paper or a digital entry as a claim on real goods. Its value is not fixed by any law of nature; it floats against other currencies based on trade flows, interest rates, inflation and, above all, trust. Understanding what moves currencies explains why the rupee strengthens or weakens, why the dollar dominates the world, and why exchange rates matter to your daily life.

Chapter 1

What determines a currency's value?

Several forces pull on it at once:

  • Trade: a country that exports more than it imports sees demand for its currency rise.
  • Interest rates and inflation: higher real rates attract foreign money and support a currency; high inflation erodes it.
  • Confidence and stability: political and financial stability draw capital in; crises drive it out.
  • Central bank action: buying and selling reserves can steady or steer a currency.
Chapter 2

What is a reserve currency, and why is the dollar one?

A reserve currency is one that other governments hold in their reserves and use to trade and borrow internationally. The US dollar has been the dominant reserve currency since the mid-twentieth century, thanks to the size of the US economy, deep and trusted financial markets, and the habit of pricing global commodities like oil in dollars. But its dominance is slowly easing.

The US dollar's share of global reserves is slipping
65%201760%202057%2025
Dollar share of allocated official reserves. Source: IMF COFER.

The dollar still dominates, but its share of global reserves has drifted down from around 65% in 2017 to about 57% by 2025 as central banks diversify.

Chapter 3

Why does the rupee move against the dollar?

Because the two currencies are traded against each other constantly. When India imports more, pays more for oil, or sees foreign investors pull money out, demand for dollars rises and the rupee tends to weaken. When exports and foreign inflows are strong, the rupee firms. The RBI smooths sharp swings using its reserves, but does not fix the rate.

🇮🇳 In India, a weaker rupee makes imports like crude oil, electronics and foreign education more expensive, feeding into inflation, while it can help exporters earn more in rupee terms.
Chapter 4

Why does this matter for you?

Because exchange rates touch your life more than you notice, in petrol prices, imported gadgets, overseas travel and education, and the returns on any global investments you hold. Knowing what moves currencies turns a confusing forex headline into something you can actually reason about.

Chapter 5

Sources

  • International Monetary Fund, Currency Composition of Official Foreign Exchange Reserves (COFER)
  • Reserve Bank of India, exchange rate data