The theory of exchange-rate determination has evolved significantly since the 1970s. Initially, exchange rates were thought to move gradually with price changes, but they actually exhibit financial price volatility. The monetary approach suggests that money influences exchange rates, while the asset approach sees a two-way causation between exchange rates and financial-market equilibrium. Recent work on rational expectations adds a layer of expectations to the model. The model integrates traditional approaches and expectations to interpret recent shifts in U.S. fiscal policy and portfolio preferences for the dollar.