The existence of international trade, international exchange and international speculation makes it necessary for banks to maintain a certain foreign exchange position and provide customers with services such as transfer and payment. Countries also need to reserve certain foreign exchange positions to prevent their currencies from financial shocks or to purchase strategic resources in the international market.
When a bank's foreign exchange position is insufficient, it can buy foreign exchange from other banks through the international market to maintain its normal operation. When a bank has too much foreign exchange position, it can improve its reserves by selling it to other banks in exchange for more domestic currency or exchanging it with other banks for other currencies.
Therefore, the inter-bank foreign exchange price forms the foreign exchange quotation in the international market.
The following price changes, just like stocks, international investors are optimistic about the prospects of a country and are willing to hold its currency, so there are many people who exchange it, and the demand exceeds the supply, and the price of the currency naturally rises, and vice versa.
There are many factors that affect exchange rate fluctuations, but they can be summarized as follows:
The speed of a country's economic growth is the most basic factor affecting exchange rate fluctuations. According to the macroeconomic theory of Keynesian school, the growth of gross national product will lead to the growth of national income and expenditure. The increase of income will lead to the expansion of the demand for imported products, and then expand the demand for foreign exchange and promote the depreciation of the local currency. The increase of expenditure means the increase of social investment and consumption, which is conducive to promoting the development of production, improving the international competitiveness of products, stimulating exports and increasing foreign exchange supply. So in the long run, economic growth will cause the appreciation of the local currency. From this perspective, the impact of economic growth on the exchange rate is complex. However, if we consider the role of currency preservation, exchange psychology has another explanation. That is, the value of money depends on the subjective evaluation of money by both the foreign exchange supply and demand sides, and the contrast of this subjective evaluation is the exchange rate. When a country's economy is developing well, its subjective evaluation is relatively high and its currency is firm.
Balance of payments This is the most direct factor affecting the exchange rate. The so-called balance of payments is simply the import and export of goods and services and the input and output of capital. In the balance of payments, if exports exceed imports and capital inflows, it means that the demand for the country's currency in the international market will increase, and the local currency will rise. On the other hand, if imports exceed exports and capital flows out, the demand for the country's currency in the international market will drop and the local currency will depreciate.
The difference between price level and inflation level Under the paper money system, the exchange rate is fundamentally determined by the actual value represented by money. According to the purchasing power evaluation, the parity of currency purchasing power is the currency exchange rate. If a country's price level is high and inflation rate is high, it means that the purchasing power of local currency declines, which leads to the depreciation of local currency. Instead, it tends to appreciate.
Differences in interest rates Some scholars believe that the impact of interest rates on exchange rates is mainly achieved through the impact on arbitrage capital flows. Under moderate inflation, higher interest rates will attract foreign capital inflows, at the same time curb domestic demand, reduce imports, and make the local currency appreciate. However, under severe inflation, interest rates are negatively correlated with exchange rates.
People's psychological expectations are particularly prominent in the current international financial market. According to exchange psychology, foreign exchange rate is the concentrated expression of subjective psychological evaluation of money by both foreign exchange supply and demand sides. If the evaluation is high and confidence is strong, the currency will appreciate. This theory plays a vital role in explaining countless short-term or extremely 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 opening and closing.