(a) Long-term factors
1. Balance of payments situation
The balance of payments, strictly speaking, refers to the income and expenditure incurred in a country's foreign economic activities. When a country's international income exceeds its expenditure, it is a balance of payments surplus; On the contrary, it is a deficit. A country's balance of payments will directly affect the supply and demand of its foreign exchange market, and then affect the exchange rate changes. Generally speaking, if a country has a balance of payments surplus, it will show oversupply in the foreign exchange market, the foreign exchange rate will fall and the local currency exchange rate will rise; If it is a deficit, the demand for foreign exchange is in short supply, the exchange rate of foreign exchange rises and the exchange rate of local currency falls. However, the impact of balance of payments on exchange rate takes a long time to play a role, and the impact of short-term, temporary and small-scale balance of payments on exchange rate is easily offset by other factors.
2. Relative inflation rate
The external value of money is based on the internal value. If the intrinsic value of money decreases, then its external value, that is, the exchange rate, will inevitably decrease. The change of the internal value of a country's currency is usually measured by the inflation rate. Inflation and rising prices mean that the purchasing power of unit currency decreases and the value it represents decreases. In the case of paper money circulation, different countries have different currency changes, so we should not only examine the inflation rate of our own country, but also the inflation rate of other countries, that is, the relative inflation rate. Generally speaking, a country with a relatively high inflation rate shows that the faster the internal value of its currency declines, the lower its local currency exchange rate and the higher its foreign exchange rate.
3. Macroeconomic situation
In addition to inflation, a country's macroeconomic situation also includes economic growth, fiscal revenue and expenditure, national income, investment environment, economic openness and many other aspects. If a country's macroeconomic situation is good and its economy is stable, its currency exchange rate will be stable; On the contrary, there will be greater fluctuations. Therefore, creating a good macroeconomic environment is an important prerequisite for maintaining exchange rate stability. (2) Short-term factors 1. Relative interest rate level interest rate is the price of borrowed funds. Interest rate, as the cost of using funds or the income of giving up using funds, will also affect the exchange rate level. Generally speaking, funds always flow from places with low interest rates to places with high interest rates. When a country's interest rate is higher than that of other countries, funds from other countries will flow into the country; Otherwise, when the interest rate in this country is lower than that in other countries, the funds in this country will flow out. The large inflow and outflow of funds will directly affect a country's foreign exchange supply and demand, especially short-term foreign exchange supply and demand, thus causing exchange rate changes. Of course, when analyzing the interest rate factors, we should not only examine the nominal interest rate, but also examine the relative real interest rate level in combination with inflation. The impact of interest rate on the long-term exchange rate is very limited, and it has a great impact on the short-term exchange rate as a policy tool to a greater extent.
2. Short-term government intervention
In order to achieve certain economic goals, the government often takes various measures to intervene in the foreign exchange market and exchange rate, and sometimes even manipulates exchange rate fluctuations. In order to avoid the adverse impact of exchange rate changes on the domestic economy, the government needs to buy and sell foreign exchange in the foreign exchange market through the central bank, so that exchange rate changes are conducive to the operation of the domestic economy. The purpose of this intervention is threefold: one is to ease the exchange rate when the exchange rate changes too drastically, the other is to stabilize the exchange rate at a certain level, and the third is to make the exchange rate float or fall to a certain level.
3. Psychological expectation
Psychological expectations sometimes have a significant impact on the exchange rate. Psychological expectations are various, including interest rate changes, exchange rate trends, inflation, international payments and other economic expectations, as well as political and social expectations such as political situation, international relations and social stability. Different expectations of these aspects will directly change people's economic behavior, such as the direction of investment and savings, and then affect the exchange rate. Due to the rapid change and great influence of psychological expectations, it often causes short-term exchange rate fluctuations. Sometimes, psychological expectation will even become the most important factor affecting the exchange rate in the market.