Exchange rate, also known as foreign exchange rate, foreign exchange rate or foreign exchange market, refers to the ratio or price 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, the devaluation of the local currency, that is, lowering the exchange rate, will promote exports and restrict imports; On the other hand, the appreciation of the local currency, that is, the rise of the exchange rate, plays a role in restricting exports and promoting imports.

Specific role:

1. Exchange rate and import and export

Generally speaking, the decline of the local currency exchange rate, that is, the depreciation of the local currency, can promote exports and curb imports; If the exchange rate of local currency rises, that is, the ratio of local currency to the outside world rises, which is beneficial to imports and unfavorable to exports.

2. Exchange rate and price

From the perspective of imported consumer goods and raw materials, the decline of exchange rate will cause the domestic price of imported goods to rise. As for the impact on the overall price index, it depends on the proportion of imported goods and raw materials in the gross national product. On the other hand, if the local currency appreciates and other conditions remain unchanged, the price of imported goods may decrease, which can play a role in restraining the overall price level.

3. Exchange rate and capital inflow and outflow

Short-term capital flows are often greatly influenced by exchange rates. When the local currency depreciates, domestic investors and foreign investors are unwilling to hold various financial assets denominated in local currency, and will convert them into foreign exchange, leading to capital outflow. At the same time, due to the continuous exchange of foreign exchange, the shortage of foreign exchange supply and demand will be aggravated, and the local currency exchange rate will be further lowered. On the other hand, when there is a trend of appreciation of local currency abroad, domestic investors and foreign investors try to hold various financial assets denominated in local currency, which will lead to capital inflows. At the same time, since foreign exchange has been converted into local currency, the oversupply of foreign exchange will further promote the exchange rate of local currency.

Source: China Gold Investment Network