In financialized capitalism with free float currency exchange, most changes in exchange rate are induced by financial and capital flows. Currencies in the periphery of the financial system are prone to exchange rate volatility (e.g., Argentinian peso, Turkish lira and so on are ‘peripheral ones’, in contrast, the centre of the system is still placed in Western financial capitals, including New York, London etc.) due to the fact that there is practically no demand to use them in financial transactions. Sadly, trade and service balances are of much less importance in shaping the exchange rate than financial flows.

I totally agree that exchange rate fluctuations are closely related to financial capital flows, and that any country should try to attract investment-related long-term capital flows and avoid depending on short-term capital flows. However, Peruvian experience with flexible exchange rates since early 90s demonstrates that the difference between peripheral and non-peripherial countries is NOT relevant for discussing exchange rate volatility. The relevant ideas are (1) whether the country's central bank has "enough" international reserves, and (2) whether the country's fiscal authority jeopardizes monetary stability by trying to use central bank's reserves as a way to finance itself or some "key sectors" ' economic activities. And this statement is closely related to the question: given that the monetary - fiscal stances are not the same across all countries, how can one expect a fixed exchange rate regime in one country to be sustainable over time? The answer is that nobody should dream about this old-fashioned anachronistic policy advice related to the failed experiences of fixed exchange rate systems in America and Europe after WW1 and the 60s and early 70s. In fact, the IMF had been calling the "Peruvian experiment" as "dirty float" (following a long tradition of a "witch hunt" strategy) for many years. Finally, the IMF had to accept the reality, as anybody else.

Of course, Peruvian experience is just one. I have found a nice paper from Ludger Schuknecht, "Fiscal Policy Cycles and the Exchange Regime in developping countries", European Journal of Political Economy, Volume 15, Issue 3, September 1999, Pages 569-580. His abstract expresses nicely the findings: "The paper studies empirically fiscal policies around elections in 25 developing countries as affected by the exchange rate regime. The purpose is to consider whether countries with flexible exchange regimes are less likely to engage in expansionary fiscal policies before elections because such policies can result in devaluations and inflation which affect government popularity adversely. The empirical results show that governments indeed try to improve their re-election prospects by expansionary fiscal policies, but only in countries with fixed exchange rates and adequate reserve levels. For some countries, this raises doubts about the usefulness of fixed exchange rates for stabilizing the macro economy, unless reforms of the institutional framework reduce the scope for election-oriented fiscal expansion."

The issue if you are able to run huge budget deficit for longer, it’s also related to being a country with own currency having reserve status or a periphery in the financial world. Being the former one allows you to run deficits. Not being traded as reserve currency like Peruvian sol will effectively limit the potential to leverage one’s economy with debt. When it comes to fixed exchange rate issues, good old fashioned currency controls are essential, even if the currency supports the authority of the accumulated gold in the vault. It is a pity that the traditional monetary role of silver and copper has been completely forgotten. VAT is levied on these raw materials in many countries. This could provide an alternative to hard gold currency in many South American countries (at a time when fiat currencies are experiencing difficulties).

Qusay Salim Jameel

The exchange rate between two currencies changes because it is determined by the supply and demand for those currencies in the foreign exchange market, a global decentralized market where currencies are bought and sold. The price of a currency is determined by its demand and supply in that sense. You should generally note that, the change is influenced by a variety of economic, political, and psychological factors such as capital flow, speculation, economic indicators, etc.

Exchange rates between two different currencies can change due to a variety of factors, including: -

1) Supply and demand: Like any other commodity, the supply and demand for a currency determine its price. If there is a high demand for a currency, its value increases, and if there is an oversupply, its value decreases.

2) Economic factors: Economic indicators such as inflation, interest rates, and GDP growth can also impact the value of a currency. For example, if a country has a high inflation rate, its currency is likely to lose value as people will want to hold onto currencies that hold their value better.

3) Political factors: Political instability, government policies, and changes in leadership can also affect the value of a currency. For example, a country with a stable political environment is more likely to have a stable currency.

4) International trade: The value of a currency can also be impacted by international trade. If a country exports more than it imports, it creates a demand for its currency, leading to an increase in its value.

5) Speculation: Finally, currency speculators can also impact exchange rates. If traders believe that a currency is going to appreciate, they will buy it, driving up its value, and if they believe it will depreciate, they will sell it, driving down its value.

@Qusay Salim Jameel

https://corporatefinanceinstitute.com/resources/economics/exchange-rate/#:~:text=A%20country's%20net%20exports%20or,relative%20to%20other%20foreign%20currencies.

https://corporatefinanceinstitute.com/resources/economics/exchange-rate/#:~:text=A%20country's%20net%20exports%20or,relative%20to%20other%20foreign%20currencies.