There are many factors that affect exchange rate changes in economic activities, which are listed as follows:
I. Balance of payments. The balance of payments is the dominant factor that determines the exchange rate trend. The balance of payments is the sum of various payments in a country's foreign economic activities. Generally speaking, the balance of payments deficit indicates a shortage of foreign exchange. Under the floating exchange rate system, market supply and demand determine the change of exchange rate, so the balance of payments deficit will cause the local currency to depreciate and the foreign currency to appreciate, that is, the foreign exchange rate will rise. On the contrary, the balance of payments surplus leads to the decline of foreign exchange rate. It should be noted that under normal circumstances, changes in the balance of payments determine the long-term trend of the exchange rate.
Second, national income. Generally speaking, the increase of national income leads to the increase of consumption level, and the demand for local currency also increases accordingly. If the money supply remains unchanged, the extra demand for local currency will increase the value of local currency and cause the depreciation of foreign exchange. Of course, whether the exchange rate will fall or rise due to changes in national income depends on the reasons for the changes in national income. If the national income is increased by increasing the supply of goods, the purchasing power of the country's currency will be strengthened and the foreign exchange rate will decline for a long time. If the national income is increased by expanding government expenditure or total demand, the excess demand must be met by expanding imports under the condition of constant supply, which will increase the foreign exchange demand and the foreign exchange rate will rise.
Third, the level of inflation. The level of inflation rate is the basis of influencing exchange rate changes. If a country issues too much money and the amount of money in circulation exceeds the actual demand in the process of commodity circulation, it will cause inflation. Inflation reduces the purchasing power of a country's currency at home and devalues it at home. Other things being equal, the domestic devaluation of the currency will inevitably lead to the external devaluation. Because the exchange rate is a comparison of the currencies of two countries, the value represented by the unit currency of a country with too much currency is reduced, so when the currency of that country is converted into foreign currency, it needs to pay more money than the original national currency.
The change of inflation rate will change people's demand for currency transactions and their expectations of bond yields and foreign currency values. Inflation leads to the rise of domestic prices. Under the condition that the exchange rate remains unchanged, exports lose money and imports are favorable. In the foreign exchange market, the demand for foreign currency increases and the demand for domestic currency decreases, which leads to the rise of foreign exchange rate and the depreciation of domestic currency. On the contrary, if a country's inflation rate decreases, the foreign exchange rate will generally decrease.
Fourth, the money supply The money supply is the primary factor that determines the value and purchasing power of money. If the domestic money supply decreases, the local currency is more valuable because of scarcity. Usually, the reduction of money supply goes hand in hand with the tightening of money supply and credit, which leads to the decline of total demand, output and employment, the decline of commodity prices, the rise of local currency value and the corresponding decline of foreign exchange rate. If the money supply increases, the surplus money will show up in the form of inflation, domestic commodity prices will rise and purchasing power will decline, thus promoting the import of relatively cheap foreign goods in large quantities and the foreign exchange rate will rise.
Verb (abbreviation of verb) financial revenue and expenditure A country's financial revenue and expenditure has a great influence on the balance of payments. The expansion of fiscal deficit will increase aggregate demand, which will often lead to balance of payments deficit and inflation. As a result, the purchasing power of local currency declines and the demand for foreign exchange increases, which in turn pushes the exchange rate up. Of course, if the fiscal deficit expands, monetary policy, supplemented by measures to strictly control the amount of money and raise interest rates, will attract foreign capital inflows, make the local currency appreciate and the foreign exchange rate fall.
Interest rate of intransitive verbs
Interest rate has a great influence on short-term exchange rate under certain conditions. The influence of interest rate on exchange rate is the flow of funds, especially short-term funds, caused by the difference of interest rates in different countries. Under normal circumstances, if the interest rate difference between the two countries is greater than the forward and spot exchange rate difference between the two countries, funds will flow from countries with lower interest rates to countries with higher interest rates, which is conducive to the balance of payments of countries with higher interest rates. It should be noted that although the interest rate level has a certain impact on the exchange rate, its role is limited from the basic factors that determine the fluctuation trend of the exchange rate. It only temporarily affects exchange rate changes under certain conditions.
Seven. Exchange rate policies and market intervention in various countries
The exchange rate policies of various countries and their intervention in the market affect the exchange rate changes to some extent. Under the floating exchange rate system, central banks of all countries are trying their best to coordinate the monetary policy and exchange rate policy among countries, trying to achieve the purpose of supporting the stability of their own currencies by affecting the supply and demand relationship in the foreign exchange market. The main means by which central banks influence the foreign exchange market are: adjusting their own monetary policies and influencing the exchange rate through interest rate changes; Direct intervention in the foreign exchange market; Implement foreign exchange controls on capital flows.
Eight. Speculation and Market Psychological Expectation
Since 1973 implemented the floating exchange rate system, speculation in the foreign exchange market has intensified. Speculators are often powerful and can add fuel to the fire in the foreign exchange market, so that the exchange rate changes are far from its equilibrium level. Speculators often use the market to attack a certain currency, and the offensive is so strong that it is difficult to prevent central banks from intervening in the foreign exchange market. Excessive speculation intensifies the turmoil in the foreign exchange market, hinders normal foreign exchange transactions and distorts the relationship between foreign exchange supply and demand.
In addition, participants and researchers in the foreign exchange market, including economists, financial experts and technical analysts, as well as fund traders, devote themselves to the study of foreign exchange market trends every day. Their judgment on the market, their influence on the psychology of market traders, and traders' own predictions on the market trend are all important factors affecting the short-term fluctuation of exchange rate. When the market expects a currency to fall, traders will sell a lot of the currency, which will lead to a decline in the exchange rate of the currency; On the contrary, when people expect a certain currency to become stronger, they will buy it in large quantities, thus making its exchange rate rise. Because the public expectation is speculative and decentralized, it intensifies the oscillation of short-term exchange rate fluctuations.
Nine. Political and unexpected factors
Because capital pursues safety first, political and unexpected factors have a direct and rapid impact on the foreign exchange market, including political stability, policy continuity, government's foreign policy, war, economic sanctions and natural disasters. In addition, the general elections in western countries will also have an impact on the foreign exchange market. Politics and emergencies, because of their suddenness and timeliness, make the market unpredictable, so it is easy to form a shock wave to the market. Once the market reacts to the news and digests it, the influence of the original news will be greatly weakened.
In a word, there are many factors that affect the exchange rate, and the relationship between these factors is complicated. Sometimes these factors work at the same time, sometimes individual factors work, and sometimes even cancel each other out. Sometimes this factor plays a major role and another factor plays a minor role. However, for a long time, the law of exchange rate changes has been restricted by the balance of payments and inflation, so it is the basic factor that determines the exchange rate changes. Interest rate factors and exchange rate policies can only play a subordinate role, that is, they can help or weaken the role played by the basic factors. A country's fiscal and monetary policies play a decisive role in exchange rate changes. Under normal circumstances, setting the exchange rate at an appropriate level has become one of the policy objectives of monetary policy in various countries. Usually, the central bank uses three policy tools to implement monetary policy, namely, deposit reserve policy, discount policy and open market policy. Speculation only adds fuel to the fire on the basis of the basic trend of exchange rate determined by other factors.