What can influence the exchange rate in a floating exchange rate system?

In a floating exchange rate system, the exchange rate is primarily determined by supply and demand dynamics in the foreign exchange market. When there is an increase in demand for a country's currency, perhaps due to increased exports or foreign investment, the value of that currency will rise relative to others. Conversely, if there is an oversupply of the currency, such as through increased imports or capital outflows, the value tends to fall.

These fluctuations illustrate how market forces respond to various factors, including economic indicators and geopolitical events, influencing the currency's valuation without the need for direct government intervention. This is in contrast to options that suggest fixes like government control, inflation in only one country, or fixed interest rates, which do not encompass the broader market-driven nature of floating exchange rates.