For many economists, the state of the balance of trade is a key factor in the currency exchange rate determination. On this way of thinking, all other things being equal, an increase in imports, which leads to a trade deficit, causes an increase in the demand for foreign currency. To obtain the foreign currency, importers sell the domestic currency for it. As a result, this causes a strengthening in the exchange rate of the foreign currency against the domestic currency (i.e., more domestic money is sold per unit of a foreign currency). Conversely, all other things being equal, an increase in exports leads to a trade surplus. Once exporters exchange their foreign currency earnings for domestic money, this leads to a strengthening in the domestic money exchange rate against the foreign money (i.e., more foreign money is sold per unit of domestic money)……..
The key factor in the currency exchange rate determination is the relative purchasing power of various monies. If, for whatever reasons, the market currency exchange rate deviates from the exchange rate as implied by the relative purchasing power of various monies this activates an arbitrage, which works towards the convergence of the exchange rate towards the relative purchasing power of monies.
This is why the famous lunch comparison of prices works so well. The price for an average lunch, purchased at, say, McDonalds versus the average shaki bento in Japan versus the average Thali in India, will give you a decent approximation of the price levels of the different currencies. This is comparing like to like in the goods themselves to tell you the price levels of all the places you are interested in comparing.