There are many factors that affect exchange rate changes. The change of a country's foreign exchange supply and demand is influenced by many factors. These factors are both economic and non-economic, and they are interrelated, restricted and even offset each other. Therefore, the reasons for exchange rate changes are extremely complicated. Let's analyze them in detail. (1) The economic factor that affects the exchange rate change is 1. The balance of payments is a comprehensive reflection of a country's foreign economic activities and has a direct impact on the changes of a country's currency exchange rate. Moreover, from the perspective of foreign exchange market transactions, international trade in goods and services constitutes the basis of foreign exchange transactions, which also determines the basic trend of the exchange rate. For example, since the mid-to-late 1980s, the US dollar has been falling in the international economic market for a long time, while the Japanese yen, on the other hand, has been constantly appreciating, mainly because of the long-standing balance of payments deficit in the United States. However, Japan continues to maintain a huge surplus. As far as the trade part of the current account of the balance of payments is concerned, when a country's imports increase and produce a deficit, it will generate additional demand for foreign currency. At this time, it will cause foreign exchange appreciation and local currency depreciation in the foreign exchange market. On the contrary, when a country has a current account surplus, it will cause an increase in foreign demand for its currency and an increase in foreign exchange supply. The exchange rate of the local currency will rise. 2. The difference of inflation rate. Inflation is a long-term, major and regular factor affecting exchange rate changes. Under the condition of paper money circulation, the ratio between the currencies of the two countries is basically determined according to the comparative relationship of the values it represents. Therefore, in the case of inflation in a country, the value represented by the country's currency will decrease, and its actual purchasing power will also decrease. Therefore, its foreign exchange rate will also fall. Of course, if inflation occurs in another country and the magnitude is just the same, the two will cancel each other out, and the nominal exchange rate between the two currencies can be unaffected. However, this situation is rare after all. Generally speaking, the inflation rates of the two countries are different, and the exchange rates of countries with high inflation rates fall. The currency exchange rate of countries with low inflation rate has risen. It is particularly noteworthy that the impact of inflation on the exchange rate generally takes some time to show, because its impact is often reflected through some economic mechanisms: (1) The inflation of a country's trade mechanism for goods and services will inevitably increase the international prices of its goods and services, thus weakening its goods. The international competitiveness of labor services affects exports and foreign exchange earnings. On the contrary, in terms of imports, assuming that the exchange rate remains unchanged, inflation will increase the profits of imported goods, stimulate the increase of imports and foreign exchange expenditures, which is not conducive to the current account situation of the country. (2) Inflation in a country with international capital flow channels will inevitably reduce the real interest rate of the country (that is, the nominal interest rate minus the inflation rate). In this way, the decline in the real income of various financial assets expressed in the currency of the country will lead investors from all countries to transfer their capital abroad, which is not conducive to the capital account situation of the country. (3) psychological expectation channels. A country's sustained inflation will affect the market's expectation of the exchange rate trend, which may lead to the phenomenon that participants in the foreign exchange market are reluctant to sell foreign exchange, waiting for the price, and have no rush to buy foreign exchange, thus affecting the foreign exchange rate. The impact of inflation on the exchange rate often takes more than half a year to show, but it lasts for a long time, usually more than a few years. 3. Differences in Economic Growth Rate Under other conditions unchanged, the actual economic growth rate of one country rises faster than that of other countries. What is the right step gorge? It will increase the country's demand for foreign goods and services, so the country's demand for foreign exchange will tend to increase relative to its available foreign exchange supply, which will lead to the decline of the country's currency exchange rate. But here we should pay attention to two special situations: first, for export-oriented countries, economic growth is driven by the increase of exports, so the rapid economic growth is accompanied by the rapid growth of exports. At this time, the increase of exports often exceeds the increase of imports, and its exchange rate will not fall but rise; Second, if domestic and foreign investors regard the country's high economic growth rate as a reflection of promising economic prospects and improved return on capital, they may expand their investment in the country and even offset the current account deficit. At this time, the country's exchange rate may rise instead of falling. These two situations coexist in China. In recent years, especially in 2003, China has been facing great pressure of RMB appreciation. Will affect the attractiveness of a country's financial assets. The rise of a country's interest rate will make its financial assets more attractive to domestic and foreign investors, which will lead to the inflow of capital and the appreciation of exchange rate. Of course, we should also consider the relative difference between one country's interest rate and that of other countries. If one country's interest rate rises, but other countries also rise at the same speed, the exchange rate will generally not be affected; If one country's interest rate rises, but other countries' interest rates rise faster, then this country's interest rate will fall relatively, and its exchange rate will tend to fall. In addition, the impact of interest rate changes on international capital flows should also consider the factors of expected exchange rate changes. Only when the sum of the expected change rate of foreign interest rate plus exchange rate is greater than the domestic interest rate, the transfer of funds abroad will be profitable. This is the "interest rate parity" of international capital arbitrage, which is very famous in the international financial field (see Chapter 6 for details). Finally, the impact of a country's interest rate changes on the exchange rate can also be exerted through trade projects. When the national interest rate increases, it means that the opportunity cost of domestic residents' consumption increases, which leads to a decline in consumer demand. At the same time, this means that the cost of capital utilization increases and the demand for domestic investment decreases. The decline in the overall level of domestic effective demand will expand exports and reduce imports, thereby increasing the country's foreign exchange supply, reducing its foreign exchange demand and appreciating its currency exchange rate. However, what needs to be emphasized here is that the impact of interest rate factors on exchange rate is short-term, and the effect of maintaining a strong exchange rate only by high interest rate is limited, because it is easy to cause exchange rate overvaluation, and once the exchange rate overvaluation is recognized by market investors (speculators), for example, after Reagan took office in the White House in the early 1980s, in order to alleviate inflation and promote economic recovery, he adopted a tight monetary policy and substantially raised interest rates. Thus, in the first half of the 1980s, the US dollar continued to rise, but by 1985, with the recession of the US economy, the phenomenon that the US dollar was overvalued was very obvious. As a result, the dollar began to depreciate sharply in the autumn of 1985. 5. Fiscal revenue and expenditure The government's fiscal revenue and expenditure is often used as the main indicator of the country's currency exchange rate forecast. When a country has a fiscal deficit, whether its currency exchange rate rises or falls mainly depends on the measures chosen by the government to make up for the fiscal deficit. Generally speaking, in order to make up the fiscal deficit, a government can take four measures: first, it can increase its fiscal revenue by raising the tax rate, if so, it will reduce the disposable income level of individuals, thus reducing the personal consumption demand, and at the same time, the increase of tax rate will reduce the investment profit rate of enterprises, thus leading to the decrease of investment enthusiasm and investment demand, which will lead to the decrease of imports of capital goods and consumer goods and the increase of exports, which will lead to the appreciation of the exchange rate; Second, reducing government public expenditure will reduce national income, reduce import demand and promote exchange rate appreciation through multiplier effect; Third, issuing additional currency, which will lead to inflation, which will lead to the depreciation of the country's currency exchange rate; Fourth, the issuance of government bonds will lead to greater price increases and the decline of the country's currency exchange rate in the long run. Of these four measures, the government is more likely to choose the latter two, especially the last one, because issuing government bonds is the least likely to bring about confrontation among its residents. On the contrary, because the national debt is known as the "Phnom Penh bond", it has high returns and low risks, providing investors with a better investment opportunity and being welcomed by people all over the world. Therefore, when a country has a fiscal deficit, its currency exchange rate tends to depreciate. 6. The level of foreign exchange reserves reflects the country's ability to intervene in the foreign exchange market and maintain exchange rate stability, so the level of foreign exchange reserves plays a major role in the country's monetary stability. Too little foreign exchange reserves will often affect the confidence of the foreign exchange market in the stability of the country's currency, which will lead to depreciation; On the contrary, foreign exchange reserves are sufficient, and the country's currency exchange rate is often relatively strong. For example,1From March to mid-April 1995, the dollar crisis broke out in the international foreign exchange market. The very important reason is that the Clinton administration used the presidential foreign exchange stabilization fund of 20 billion dollars to alleviate the Mexican financial crisis at that time, which shook the confidence of the foreign exchange market in the ability of the US government to intervene in the foreign exchange market. (2) Psychological expectation is in the foreign exchange market. Whether people buy or sell a currency has a lot to do with traders' views on the future. When traders expect that the exchange rate of a currency may fall in the future, they will throw out a lot of this currency to avoid losses or gain extra benefits, and when they expect that a currency may rise in the future, they will buy a lot of this currency. Some international foreign exchange experts even think that the expectation psychology of foreign exchange traders for a certain currency is now the most important factor to determine the exchange rate change of the currency market, because under the control of this expectation psychology, large-scale capital flows will be induced in an instant. Because the formation of foreign exchange traders' expectation psychology generally depends on a country's economic growth rate, money supply, interest rate, balance of payments and foreign exchange reserves, government economic reform, international political situation and some emergencies are all very complicated factors. Therefore, expectation psychology not only has a great influence on exchange rate changes, but also has the characteristics of uncertainty and variability. (3) Information Factors The modern foreign exchange market has gradually developed into an efficient market due to highly developed communication facilities, close ties between financial markets of various countries and increasingly perfect trading technology. Therefore, any small profit opportunity in the market will immediately lead to a large-scale international flow of funds, thus making this profit opportunity disappear rapidly. In this case, whoever gets the "news" or information that can affect the supply-demand relationship and expected psychology in the foreign exchange market first may react immediately before other market participants know the truth, thus making a profit. At the same time, it is important to note that expectation psychology has a great influence on exchange rate. The reaction of the foreign exchange market to the government's "news" depends not only on whether the "news" itself is "good news" or "bad news", but also on whether it is expected, better or worse than expected. In short, with the increasingly developed foreign exchange market, it has a subtle and powerful impact on exchange rate fluctuations. (4) Government intervention factors Exchange rate fluctuations will have an important impact on a country's economy. At present, governments (central banks) often intervene in the foreign exchange market in order to stabilize the foreign exchange market and maintain healthy economic development. There are four main intervention methods: ① buying or selling foreign exchange directly in the foreign exchange market; ② Adjust domestic monetary policy and fiscal policy; (3) making comments on an international scale, affecting market psychology; (4) Direct or indirect intervention through policy coordination with other countries. This kind of intervention is sometimes large in scale and momentum, and often billions of dollars can be invested in the market within a few days. Of course, this is only a drop in the bucket compared with the current foreign exchange market transaction scale of over 1.2 trillion, but to some extent, government intervention, especially international joint intervention, can affect the psychological expectation of the whole market, thus reversing the exchange rate trend. Therefore,