What is the exchange rate?

   1. Introduction of exchange rate

   Exchange rate refers to the ratio or price ratio of one country’s currency to another country’s currency, or the price of another country’s currency expressed in one country’s currency. Exchange rate changes have a direct regulatory effect on a country’s import and export trade. Under certain conditions, by devaluing the domestic currency, that is, letting the exchange rate fall, it will promote exports and restrict imports; on the contrary, the foreign appreciation of the domestic currency, that is, an increase in the exchange rate, will play a role in restricting exports and increasing imports.

   Exchange rate (also known as foreign exchange rate, foreign exchange rate or foreign exchange market) The ratio of exchange between two currencies can also be regarded as the value of one country’s currency to another. The exchange rate is a financial means used by various countries to achieve their political goals. Exchange rates will change due to interest rates, inflation, national politics and each country’s economy. The exchange rate is determined by the foreign exchange market.

   Two, fluctuation

The People’s Bank of China authorized the China Foreign Exchange Trade System to announce that the central parity of the RMB exchange rate in the inter-bank foreign exchange market on October 28, 2012 was: 1 US dollar to RMB 6.2485, 1 Euro to RMB 8.0818, 100 Japanese Yen to RMB 7.8509, and 1 Hong Kong dollar. For RMB 0.8062, 1 pound to RMB 10.055, 1 Australian dollar to RMB 6.4784, 1 Canadian dollar to RMB 6.2629, RMB 1 to 0.4840 ringgit, and RMB 1 to 5.085 Russian ruble.

   3. The role of exchange rate

   From the perspective of imported consumer goods and raw materials, the decline in the exchange rate will cause the domestic price of imported goods to rise. The extent of its impact on the general price index depends on the proportion of imported goods and raw materials in the gross national product. On the contrary, if other conditions remain unchanged, the price of imported goods may decrease. As for the extent of its influence on the general price index, it depends on the proportion of imported goods and raw materials in the gross national product. Short-term capital flows are often greatly affected by exchange rates. When there is a trend of external depreciation of domestic currency, domestic and foreign investors are reluctant to hold various financial assets denominated in domestic currency and will convert them into foreign exchange, causing capital outflows. At the same time, due to the exchange of foreign exchange, the demand for foreign exchange is intensified, and the exchange rate of the local currency will fall further. Conversely, when there is a trend of external appreciation of the domestic currency, domestic investors and foreign investors will strive to hold various financial assets denominated in the domestic currency, which will trigger capital inflows. At the same time, the oversupply of foreign exchange will cause the exchange rate of the local currency to rise further due to the exchange of foreign exchange to the domestic currency.

   What is the fundamental reason that determines the direction of foreign exchange rates?

  The fluctuation of foreign exchange rate, although ever-changing, is the same as other commodities. In the final analysis, it is determined by the relationship between supply and demand. In the international foreign exchange market, when there are more buyers of a certain currency than sellers, buyers rush to buy, and the buyer’s power is greater than the seller’s power; the seller’s odd goods can live, and the price will inevitably rise. Conversely, when sellers see poor sales and compete to sell a certain currency, and market sellers have the upper hand, the exchange rate will inevitably fall.

   But there are many factors that affect the balance of supply and demand, but in summary, there are mainly the following:

   1. The economic growth rate of a country. This is the most basic factor affecting exchange rate fluctuations. According to the Keynesian macroeconomic theory, the growth of gross national product will cause the growth of national income and expenditure. Increasing income will lead to an expansion of demand for imported products, which in turn will increase the demand for foreign exchange and promote the devaluation of the domestic currency. The increase in expenditure means an increase in social investment and consumption, which is conducive to promoting the development of production, improving the international competitiveness of products, and stimulating exports to increase foreign exchange supply. So in the long run, economic growth will cause the currency to appreciate. From this point of view, the impact of economic growth on the exchange rate is complex. But if you consider the role of currency preservation, exchange psychology has another explanation. That is to say, the value of currency depends on the subjective evaluation of currency made by the supply and demand sides of foreign exchange, and the comparison of this subjective evaluation is the exchange rate. If a country’s economic development is good, the subjective evaluation is relatively high, and the country’s currency is strong.

   2. The balance of international payments. This is the most direct factor that affects the exchange rate. Regarding the role of the balance of payments on the exchange rate, as early as the 1860s, the British Gerson made a detailed elaboration, and later, the asset portfolio theory also mentioned it. The so-called balance of payments, to put it simply, refers to the import and export of goods and services, and the import and export of capital. If exports are greater than imports in the balance of payments, and capital flows in, which means that the international market’s demand for the country’s currency increases, the local currency will rise. Conversely, if imports are greater than exports and capital flows out, the international market’s demand for the country’s currency will decline and the currency will depreciate.

   3. The difference between the price level and the inflation level. Under the paper currency system, the exchange rate is fundamentally determined by the actual value of the currency. According to the purchasing power evaluation, the ratio of currency purchasing power is the currency exchange rate. If the price level of a country is high and the inflation rate is high, it means that the purchasing power of the domestic currency is declining, which will promote the devaluation of the domestic currency. On the contrary, it tends to appreciate.

   4. The difference in interest rate levels. The theories of all the monetary schools have discussed the role of interest rates in exchange rate fluctuations. But the most clear explanation is the interest rate evaluation theory that emerged after the 1970s. This theory explains the changes in exchange rates from a short- and medium-term perspective. The impact of interest rates on exchange rates is mainly realized through the impact on arbitrage capital flows. Under moderate inflation, higher interest rates will attract the inflow of foreign funds, while restraining domestic demand, reducing imports and increasing the domestic currency. But under severe inflation, interest rates are negatively correlated with exchange rates.

   5. People’s psychological expectations. This factor is particularly prominent in the current international financial market. Exchange psychology believes that the foreign exchange rate is a concentrated expression of the subjective psychological evaluation of currency on both sides of the foreign exchange supply and demand. If the evaluation is high and confidence is strong, the currency will appreciate. This theory has played a vital role in explaining numerous short-term or extremely short-term exchange rate fluctuations.

   In addition, factors that affect exchange rate fluctuations also include the government’s currency, exchange rate policies, the impact of emergencies, the impact of international speculation, the release of economic data, and even the impact of the opening and closing.

   These factors will also strengthen or offset each other.