Balance of payments situation. The balance of payments is a factor that directly affects the exchange rate changes. Its influence mechanism is that the balance of payments, such as surplus or deficit, will be immediately reflected in a country's foreign exchange market, and this relationship between foreign exchange supply and demand will affect the formation of exchange rate in the foreign exchange market. For example, if the balance of payments surplus means that the foreign exchange supply is temporarily greater than the foreign exchange demand, that is, the foreign exchange rate should fall (depreciate) and the local currency exchange rate should rise (appreciate); When there is a deficit in the balance of payments, there will inevitably be downward pressure on the local currency exchange rate and the need for the foreign currency exchange rate to rise.
The above is the exchange rate change obtained by theoretical reasoning. However, will this mechanism definitely affect the final exchange rate? Further market restrictions and intervention are needed. If the balance of payments surplus is taken as an example, if the country's central bank doesn't want to see the appreciation of the local currency at this time, it will buy excess foreign exchange and throw out the local currency when there is an oversupply of foreign exchange in the foreign exchange market, thus balancing the situation of excess foreign exchange and insufficient local currency at that time, making the supply and demand of foreign exchange basically balanced and the exchange rate stable. The changes brought about by this stability are the increase of the central bank's foreign exchange reserves and the introduction of the base currency.
Inflation rate Inflation rate is an important indirect factor affecting a country's currency exchange rate. The influence of inflation rate on exchange rate is often realized in two ways. On the one hand, the inflation rate shows that price changes will affect the competitiveness of a country's goods and services in the world market. When the inflation rate of one country is higher than that of another country, the prices of its goods and services will rise, which will lead to a relative decrease in exports and a relative increase in imports, thus putting pressure on the balance of payments. The balance of payments deficit is reflected in the foreign exchange market, which will put pressure on foreign exchange appreciation and local currency depreciation. This is one aspect of the impact of inflation on exchange rate changes. On the other hand, the inflation rate will also affect the supply and demand of the foreign exchange market and the exchange rate by affecting the real interest rate. When the inflation rate of a country is higher than that of other countries, the real interest rate of the country will drop, and the drop of interest rate will reduce the return on investment of investors, so the funds will flow out of the country, and the flow of funds will change the supply and demand of foreign exchange in the foreign exchange market, which will lead to the change of exchange rate.
However, whether the inflation rate is necessarily reflected in the exchange rate needs further study. First of all, because inflation indirectly affects the exchange rate, the efficiency of its transmission mechanism is very important. If a country's price mechanism is more sensitive and perfect, then the impact of inflation difference on exchange rate will be more significant. However, if a country's price mechanism itself is not smooth and enterprises are not sensitive to prices, then inflation will not have much impact on the exchange rate no matter how it changes. Secondly, it takes some time for inflation to affect the corresponding change of exchange rate, and there is a "time lag effect".
Differences in interest rate levels. In the current international environment with frequent and huge capital flows, interest rate is another important factor affecting exchange rate changes. Because it is not only a basic indicator of a country's economic and financial situation, but also reflects a country's financing cost and investment profit. When one country's interest rate is higher than that of other countries, especially the international interest rate, it will often lead to a large-scale inflow of short-term capital, which will cause temporary pressure on the relationship between supply and demand in the foreign exchange market to reduce the foreign exchange rate and increase the local currency exchange rate. In the long run, a country's higher interest rate will increase the financing cost of foreign investors and affect the inflow of foreign capital, so that the supply and demand of foreign exchange market are relatively under the pressure that the supply of foreign exchange is less than demand and the supply of local currency exceeds demand.
Foreign exchange intervention. As the exchange rate is becoming more and more important, no country wants its currency exchange rate to fluctuate greatly. In addition to making efforts in the selection and improvement of exchange rate system, all countries seek to make further arrangements in exchange rate policy and intervene in exchange rate at any time to keep it within their desired target range. To some extent, this intervention is different from the exchange rate level determined by basic factors.
As we all know, before this currency devaluation, the United States has long adhered to a strong dollar policy. Therefore, although there is a huge deficit in the current account of the US balance of payments, it has not changed the trend of the US dollar exchange rate. This shows that in an economy like the United States, where the exchange rate is basically determined by market forces, the change of exchange rate is still affected by exchange rate policy and foreign exchange intervention. Another typical example is Japan. Although Japan's economy collapsed after the 1990s, its current account remained in surplus. Theoretically, its currency exchange rate should appreciate. But what we see is the sharp depreciation of the yen after 1995, even reaching the level of 1 USD 150 yen until 1998. Since then, the yen has been weak. These are closely related to active foreign exchange intervention.