We develop a theory of exchange rate fluctuations arising from financial institutions’ demand for liquid dollar assets. Financial flows are unpredictable andmay leave banks “scrambling for dollars.” As a result of settlement frictions in interbank markets, a precautionary demand for dollar reserves emerges and gives rise to an endogenous convenience yield. In our framework, an increase in the volatility of idiosyncratic liquidity shocks leads to a rise in the convenience yield and an appreciation of the dollar—as banks scramble for dollars—while foreign exchange interventions matter because they alter the relative supply of liquidity in different currencies. We present empirical evidence on the relationship between exchange rate fluctuations for the G10 currencies and the quantity of dollar liquidity consistent with the theory.