1. The exchange rate determination theory is one of the core contents of international financial theory, which mainly analyzes what factors determine and affect the exchange rate. The exchange rate determination theory develops with the development of economic situation and western economic theory, which provides a theoretical basis for a country's monetary authorities to formulate exchange rate policies. The theories of exchange rate determination mainly include international lending theory, purchasing power parity theory, rate parity, balance of payments theory and asset market theory. Asset market theory is divided into currency analysis and portfolio analysis. Monetary analysis is divided into elastic price monetary analysis and viscous price monetary analysis.

The exchange rate is determined by the supply and demand in the foreign exchange market. The supply and demand of foreign exchange comes from international borrowing. International lending can be divided into fixed lending and mobile lending. The former refers to loans that have been formed but have not yet entered the actual payment stage; The latter refers to loans that have entered the payment stage. Only the change of current borrowing will affect the supply and demand of foreign exchange.

3. Factors affecting exchange rate changes The actual value represented by the two currencies is the basis of exchange rate determination, and the exchange rate is constantly changing under the influence of the following main factors.

(1) balance of payments: foreign trade balance plays a decisive role in exchange rate changes. Foreign trade surplus, the local currency exchange rate will rise; On the contrary, it will fall. The balance of foreign trade directly affects foreign exchange supply and demand.

(2) Inflation: It is not only directly related to the actual value and purchasing power of the currency itself, but also related to the external competitiveness of commodities and the psychological impact on the foreign exchange market. When inflation slows down, the local currency exchange rate will rise; On the contrary, it will fall.

(3) The influence of interest rate level on capital flow: Under certain conditions, high interest rate level can attract international short-term capital inflows and raise the exchange rate of local currency; Low interest rates are the opposite. The dollar strengthened in the first half of 1980s, which was the result of the high interest rate policy in the United States.

(4) Exchange rate policies of various countries: Although exchange rate policies cannot change the basic trend of exchange rates, the role of further measures taken by a country to aggravate the decline or rise of its local currency exchange rate according to the trend of its own currency cannot be underestimated.

(5) Speculation: especially foreign exchange speculation by multinational companies. Sometimes it can make the exchange rate fluctuation exceed the expected reasonable range.

(6) Political events: Sudden major political events in the world also have a significant impact on exchange rate changes.