Why does a dollar buy more foreign currency on some days than others?

Because for many of the world's currencies, nobody fixes that price by decree; it is set continuously by whoever is buying and selling at that moment. An exchange rate is the rate at which one currency is exchanged for another, and each country chooses how that rate is set: floating, pegged at a fixed rate, or some hybrid. In a free-floating system, the rate is determined in the foreign exchange market, open to a wide range of buyers and sellers and trading 24 hours a day except weekends. As supply and demand shift, the rate changes almost constantly, which is why a dollar can buy a different amount of foreign money from one day to the next.

It wasn't always like this. From the end of World War II until 1967, Western European countries kept fixed exchange rates with the US dollar under the Bretton Woods system. On August 15, 1971, President Richard Nixon said in a speech that market pressures and speculation meant the system had to give way to floating, market-based regimes, a moment known as the Nixon Shock. Some governments still hold their currency in a narrow range, as China pegged the yuan at 8.2768 to the dollar between 1994 and 2005, but holding a currency there can leave it over- or under-valued and lead to excessive trade deficits or surpluses.

In 1986, Pam Woodall offered a playful yardstick in The Economist: the Big Mac Index, which compares the price of the same burger around the world. In July 2023, a Big Mac cost 6.70 Swiss francs in Switzerland and $5.58 in the United States, an implied rate of 1.20 francs per dollar. Compare that with the actual market rate and you get a rough sense of whether a currency looks over- or under-valued.