The theory of exchange-rate determination has evolved significantly since the 1970s. Initially, exchange rates were thought to be stable functions of exports and imports, but the reality of floating rates showed their volatility. This led to the development of the monetary and market approaches, which consider the two-way causation between exchange rates and financial-market equilibrium. The asset approach includes a dynamic feedback mechanism involving foreign assets and exchange rates. Recent work on rational expectations adds a layer of expectations to the model, allowing for anticipation of future movements in the system. The model integrates traditional elasticities and absorption approaches with general equilibrium fundamentals and expectations. This model has been used to interpret recent shifts in U.S. fiscal policy and portfolio preferences for the dollar.