Exchange rate is the price expressed by one country's currency in another country's currency. It is made by buyers and sellers in the foreign exchange market. People who care about the RMB exchange rate may not necessarily understand the logic behind it, but they often see words such as foreign exchange reserves, current account, capital and financial account, and foreign direct investment. Exchange rate is a kind of price, and the main function of price is resource allocation. If the RMB exchange rate is too high, many enterprises that rely on low exchange rate for export will have no choice but to turn to domestic sales, which is not good for export. Foreign investors also don't like the high exchange rate of RMB, which will greatly reduce the inflow of foreign direct investment into China. In short, due to the high exchange rate, China simply cannot accumulate so many foreign exchange reserves.
The reason for the difference in exchange rate level is influenced by the balance of payments. Simply put, the so-called balance of payments is the import and export of goods and services, and the import and export of capital. In the balance of payments, if exports exceed imports and capital flows into China, the demand for money in the international market will increase and the local currency will appreciate. On the contrary, if imports exceed exports and capital flows out, the demand for the country's currency in the international market will decrease and the local currency will depreciate. Under the paper money system, the exchange rate is fundamentally determined by the actual value represented by money. According to purchasing power evaluation, currency purchasing power parity refers to currency exchange rate. A country's high price level and high inflation rate indicate that the decline of local currency purchasing power will promote the depreciation of local currency. Otherwise it will tend to appreciate.
Some scholars believe that the impact of interest rate on exchange rate is mainly achieved through the impact on arbitrage capital flow. Moderate inflation and higher interest rates will attract foreign capital inflows, curb domestic demand, reduce imports and make the local currency appreciate. In the case of serious inflation, interest rates are always negatively correlated with exchange rates. This psychological expectation factor is particularly prominent in the current international financial market. According to exchange rate psychology, exchange rate is a concentrated expression of subjective psychological evaluation of money by both foreign exchange supply and demand sides. High evaluation, strong confidence and currency appreciation. China's theory plays a vital role in explaining many short-term or very short-term exchange rate fluctuations. In addition, the factors affecting exchange rate fluctuations include the government's monetary and exchange rate policies, the impact of emergencies, the impact of international speculation, the publication of economic data, and even the impact of market opening and closing.