This paper develops a model of exchange rate determination that integrates the roles of relative prices, expectations, and the assets markets, and emphasizes the relationship between the behavior of the exchange rate and the current account. It builds on and extends recent work by Pentti Kouri and others. Early theories of the exchange rate focused on purchasing power parity or the current account as the chief determinants. Later work, particularly by Mundell and Fleming, introduced capital mobility as an important aspect of exchange rate determination. In this theory, the exchange rate achieves a level such that the goods market clears and money demand equals money supply at the prevailing level of income and world interest rates. Extensions of this approach have emphasized the possibility of international nominal interest differentials arising from exchange rate expectations. These formulations have introduced the idea of exchange rate dynamics and overshooting. In parallel, exchange rate theory has been extended to reintroduce the current account as an important determinant of the exchange rate. The introduction of rational expectations merges the assets and current account theories of exchange rates. The paper extends this literature in two respects. First, it departs from the one-commodity model and assumes that the country produces a differentiated product with a world relative price that is endogenous. Second, it considers the current effects of anticipated future disturbances. The paper develops a model with static expectations, then extends it to perfect foresight. It analyzes the effects of anticipated future disturbances and concludes with a discussion of the model's implications. The model considers a small open economy with flexible prices and full employment. The exchange rate is determined by the money market and goods market equilibria. The current account is determined by the excess of income over spending. The paper shows that an increase in external assets leads to an appreciation in the exchange rate. The model also shows that an increase in the expected rate of depreciation of the exchange rate leads to an actual depreciation. The paper also discusses the dynamic adjustment process under rational expectations. It shows that an increase in the expected rate of depreciation leads to an actual depreciation of the exchange rate. The paper also discusses the effects of anticipated disturbances on the exchange rate and current account. It shows that an anticipated increase in the money supply initially leads to a current account surplus and a depreciation of the exchange rate. After the money supply increases, the exchange rate appreciates. The paper concludes that the current account and the exchange rate are closely related. The current account determines the exchange rate over time, while the exchange rate determines the current account in the short run. The paper provides a theoretical rationale for the popular view that there is an association between the current account and the behavior of the exchange rate. However, it also notes that anticipated disturbances can initially lead to a current account deficit and an appreciating exchange rate, contrary to the conventional view.This paper develops a model of exchange rate determination that integrates the roles of relative prices, expectations, and the assets markets, and emphasizes the relationship between the behavior of the exchange rate and the current account. It builds on and extends recent work by Pentti Kouri and others. Early theories of the exchange rate focused on purchasing power parity or the current account as the chief determinants. Later work, particularly by Mundell and Fleming, introduced capital mobility as an important aspect of exchange rate determination. In this theory, the exchange rate achieves a level such that the goods market clears and money demand equals money supply at the prevailing level of income and world interest rates. Extensions of this approach have emphasized the possibility of international nominal interest differentials arising from exchange rate expectations. These formulations have introduced the idea of exchange rate dynamics and overshooting. In parallel, exchange rate theory has been extended to reintroduce the current account as an important determinant of the exchange rate. The introduction of rational expectations merges the assets and current account theories of exchange rates. The paper extends this literature in two respects. First, it departs from the one-commodity model and assumes that the country produces a differentiated product with a world relative price that is endogenous. Second, it considers the current effects of anticipated future disturbances. The paper develops a model with static expectations, then extends it to perfect foresight. It analyzes the effects of anticipated future disturbances and concludes with a discussion of the model's implications. The model considers a small open economy with flexible prices and full employment. The exchange rate is determined by the money market and goods market equilibria. The current account is determined by the excess of income over spending. The paper shows that an increase in external assets leads to an appreciation in the exchange rate. The model also shows that an increase in the expected rate of depreciation of the exchange rate leads to an actual depreciation. The paper also discusses the dynamic adjustment process under rational expectations. It shows that an increase in the expected rate of depreciation leads to an actual depreciation of the exchange rate. The paper also discusses the effects of anticipated disturbances on the exchange rate and current account. It shows that an anticipated increase in the money supply initially leads to a current account surplus and a depreciation of the exchange rate. After the money supply increases, the exchange rate appreciates. The paper concludes that the current account and the exchange rate are closely related. The current account determines the exchange rate over time, while the exchange rate determines the current account in the short run. The paper provides a theoretical rationale for the popular view that there is an association between the current account and the behavior of the exchange rate. However, it also notes that anticipated disturbances can initially lead to a current account deficit and an appreciating exchange rate, contrary to the conventional view.