There are many factors that affect exchange rate changes. In general, changes in a country's economic strength and macroeconomic policy choices are the fundamental reasons for determining the long-term development trend of the exchange rate. We can often see that in the foreign exchange market, market participants are very concerned about various economic data of various countries, such as gross national economic output, consumer price index, interest rate changes, etc. In the foreign exchange market, we should clearly understand and understand the relationship and impact of various data, indicators and exchange rate changes, so that we can further find the laws of exchange rate changes, actively look for investment speculation opportunities in the foreign exchange market, and prevent foreign exchange risks.

There are many factors that affect exchange rate changes in economic activities, which are listed below:

1. Balance of payments. The balance of payments situation is the dominant factor in determining exchange rate trends. The balance of payments is the sum of various receipts and payments in a country's external economic activities. Generally, a balance of payments deficit indicates that the supply of foreign exchange exceeds demand. Under a floating exchange rate system, market supply and demand determine exchange rate changes, so a balance of payments deficit will cause the depreciation of the local currency and the appreciation of foreign currencies, that is, an increase in the foreign exchange rate. On the contrary, the balance of payments surplus will cause the foreign exchange rate to fall. It should be noted that, under normal circumstances, changes in the balance of payments determine the mid- to long-term trend of the exchange rate.

2. National income. Generally speaking, an increase in national income leads to an increase in consumption levels and a corresponding increase in demand for domestic currency. If the money supply remains unchanged, additional demand for the domestic currency will increase the value of the domestic currency, causing foreign exchange to depreciate. Of course, whether changes in national income cause the exchange rate to depreciate or rise depends on the reasons for the change in national income. If national income increases due to an increase in the supply of goods, the purchasing power of the country's currency will be strengthened over a longer period of time, and the foreign exchange rate will fall. If national income increases due to expansion of government spending or expansion of aggregate demand, and the supply remains unchanged, the excess demand must be met by expanding imports, which will increase the demand for foreign exchange and the foreign exchange rate will rise.

3. The level of inflation rate. The level of inflation is the basis for changes in exchange rates. If a country issues too much currency and the amount of currency in circulation exceeds the actual demand during the circulation of goods, inflation will occur. Inflation reduces the domestic purchasing power of a country's currency, causing the currency to depreciate internally. When other conditions remain unchanged, internal devaluation of a currency will inevitably lead to external devaluation. Because the exchange rate is a comparison of the currency values ??of two countries, a country that issues too much currency will have a reduced value represented by its unit currency. Therefore, when the country's currency is converted into a foreign currency, it will have to pay more of the country's currency than the original.

Changes in the inflation rate will change people's demand for currency transactions and expectations for bond returns and foreign currency values. Inflation causes domestic prices to rise. If the exchange rate remains unchanged, exports will suffer losses and imports will benefit. In the foreign exchange market, the demand for foreign currency increases and the demand for domestic currency decreases, which causes the foreign exchange rate to rise and the domestic currency to depreciate externally. On the contrary, if a country's inflation rate decreases, the foreign exchange rate will generally fall.

4. Money supply Money supply is the primary factor that determines currency value and currency purchasing power. If the domestic currency supply decreases, the domestic currency becomes more valuable due to its scarcity. Usually, a reduction in the money supply is accompanied by a monetary tightening and a credit tightening, resulting in a decrease in aggregate demand, output and employment, a decrease in commodity prices, an increase in the value of the local currency, and a corresponding decrease in the foreign exchange rate. If the money supply increases, excess money will manifest itself in the form of inflation. Domestic commodity prices will rise and purchasing power will decrease. This will promote large-scale imports of relatively cheap foreign goods and the foreign exchange rate will rise.

5. Fiscal Balance and Expenditure The financial balance and expenditure of a country has a great influence on the international balance of payments. Expanding the fiscal deficit will increase aggregate demand, often leading to an increase in international balance of payments deficit and inflation. As a result, the purchasing power of the domestic currency decreases and the demand for foreign exchange increases, which in turn drives the exchange rate to rise. Of course, if the fiscal deficit expands and monetary policy is supplemented by measures to strictly control the amount of money and raise interest rates, it will attract foreign capital inflows, causing the local currency to appreciate and the foreign exchange rate to fall.

6. Interest rate. Interest rate has a great short-term impact on the exchange rate under certain conditions. The impact of interest rates on exchange rates is caused by differences in interest rates in different countries causing the flow of funds, especially short-term funds. Under normal circumstances, if the difference in interest rates between two countries is greater than the difference in forward and spot exchange rates between the two countries, funds will flow from the country with lower interest rates to the country with higher interest rates, thus benefiting the international balance of payments of the country 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 in terms of the basic factors that determine the upward and downward trend of the exchange rate. It only has a temporary impact on the changes in the exchange rate under certain conditions.

7. Countries’ exchange rate policies and market intervention

Country’s exchange rate policies and market intervention affect exchange rate changes to a certain extent. Under the floating exchange rate system, central banks of various countries try their best to coordinate the monetary policies and exchange rate policies of various countries, and strive 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 policy affects the exchange rate through interest rate changes; directly intervenes in the foreign exchange market; and implements foreign exchange controls on capital flows.

8. Speculative activities and market psychological expectations

Since the implementation of the floating exchange rate system in 1973, speculative activities in the foreign exchange market have become more and more intense. Speculators often have strong strength and can This adds fuel to the fire in the foreign exchange market, causing the exchange rate to move far away from its equilibrium level. Speculators often take advantage of the market trend to launch an attack on a certain currency. The offensive is so strong that it is difficult for central banks of various countries and even the central banks of the seven Western countries to jointly intervene in the foreign exchange market. Excessive speculation has intensified the turbulence of the foreign exchange market, hindered normal foreign exchange transactions, and distorted the relationship between supply and demand for foreign exchange.

In addition, participants and researchers in the foreign exchange market, including economists, financial experts, technical analysts, and fund traders, are committed to studying the trends of the foreign exchange market every day. The influence of traders' psychology and traders' own predictions of market trends are important factors affecting short-term fluctuations in exchange rates. When the market expects a certain currency to decline, traders will sell the currency in large quantities, causing the currency's exchange rate to fall; conversely, when people expect a certain currency to strengthen, they will buy the currency in large quantities, causing it to The exchange rate rose. Due to the speculative and dispersive nature of public expectations, short-term fluctuations in exchange rates are exacerbated.

9. Political and unexpected factors

Since capital first pursues safety, political and unexpected factors have a direct and rapid impact on the foreign exchange market, including Political stability, policy continuity, government foreign policy as well as war, economic sanctions and natural disasters. In addition, general elections in Western countries will also have an impact on the foreign exchange market. Political and emergencies make it difficult to predict the market due to their suddenness and temporary nature, so they can easily cause shock waves to the market. Once the market reacts to and digests the news, the influence of the original news will be greatly weakened.

In short, there are many factors that affect the exchange rate, and the relationship between these factors is intricate. Sometimes these factors work at the same time, sometimes individual factors work, sometimes they even offset each other, and sometimes this factor plays a role. The main role, another factor plays a secondary role. However, over a long period of time, the law of exchange rate changes is restricted by the balance of payments and inflation, and is therefore the basic factor that determines exchange rate changes. Interest rate factors and exchange rate policies can only play a subordinate role, that is, to encourage or weaken fundamentals. the role of factors. A country's fiscal and monetary policies play a decisive role in exchange rate changes. Generally, in the monetary policies of various countries, setting the exchange rate at an appropriate level has become one of the policy goals. Usually, the central bank uses three major policy tools to implement monetary policy, namely, deposit reserve policy, discount policy and open market policy. Speculative activities only contribute to the basic trend of exchange rates determined by other factors.