What determines exchange rates?

According to Shostak “what matters for [a currency’s] rate of exchange is the pace of money expansion relative to real economic growth — not the state of the trade account.” Elsewhere, he argues against the widely held view that, “exchange rates are determined by the state of the balance of payments. According to this view, a widening in the balance of payments deficit raises the demand for and lowers the supply of foreign currency and this leads to the depreciation of the domestic currency.” In the same post Shostak provides an alternative explanation: “According to the Austrian school the exchange rate of a currency like the price of any other good is determined by its relative scarcity in relation to the demand to hold currency.”

If foreign central banks decide to buy a certain currency (while debasing their own) that will help maintain a relatively strong exchange rate even if the issuer of the relevant currency has a large trade deficit.