how does the exchange rates of different currencies work?

Answer 1

The currency market is made up of a group of large money center banks who trade currencies for their business clients. As these businesses (importers and exporters) need more of a particular currency to pay their foreign suppliers, the demand for that currency rises, and so does the value of that country's currency.

Answer 2

theoretically, all currencies funciton under an efficient market (that is, a market where all info are available and shared and no inside information exist).

practically, the exchange rate is a quota. that is when u see a rate for €/$ to be quoted as 1,28 it means that with one euro you can have 1,28 $. if a market sells more eur than $ then the above mentioned rate becomes smaller i.e. 1,25

there r various exchange rates depending on the pair of currencies one is interested in.

theories about exchange rates and their relationships with inflation, interest rates etc can be retrieved from the theory purchasing power parity theory (known as PPP).