There are two pricing methods for foreign exchange rates:
(1) Direct quotation (refer to "Price payable method").
(2) Indirect quotation (refer to "Accounts Receivable Quotation Method")
Under the gold standard system, the basis of exchange rate determination is the gold delivery point, and under the condition of paper money circulation, the basis of exchange rate determination is purchasing power parity.
The factors that affect the exchange rate change are:
(1) Balance of payments. If a country has a surplus in its balance of payments, its currency exchange rate will rise; If it is a deficit, the exchange rate of the country's currency will fall.
(2) inflation. If the inflation rate is high, the country's currency exchange rate is low.
(3) interest rate. If a country's interest rate rises, the exchange rate will be high.
(4) Economic growth rate. If a country's economic growth rate is high, its currency exchange rate is high.
(5) fiscal deficit. If a country has a huge budget deficit, its currency exchange rate will fall.
(6) foreign exchange reserves. If a country's foreign exchange reserves are high, its currency exchange rate will rise.
Relationship between interest rate and exchange rate
In the foreign exchange market, the change of a country's currency interest rate will cause the change of its exchange rate. Under normal circumstances, if a country's currency raises interest rates, the exchange rate of the currency will easily rise; When a country's currency cuts interest rates, it is easy to depreciate. Take the pound as an example. Since the beginning of this year, the base interest rate of the British pound has dropped below 5%, and the exchange rate against the US dollar has also dropped from 1 to 1.50.
However, in this relationship, there is a certain particularity. This often happens in the foreign exchange market. For example, when the interest rate hike was officially announced, the country's currency fell instead of rising, and when the interest rate cut was officially announced, the country's currency rose instead of falling. This phenomenon shows that the market has digested the advantages of raising interest rates or the disadvantages of cutting interest rates in advance. For example, in June 2000, the European Central Bank raised interest rates on the euro, but after the news was announced, the exchange rate of the euro quickly fell from 1 euro to 0.97 US dollars, mainly because the market had pushed the euro from 1 euro to 0.90 US dollars in advance.
Therefore, when trading foreign exchange treasures, investors should master the following operational skills about the relationship between currency interest rate and exchange rate: generally, when a country's currency has a trend of raising interest rates, buy the country's currency, and once the news is official, mainly sell it; On the other hand, when a country's currency tends to cut interest rates, it will be sold, and once the news is official, it will be repurchased.