All involve one another, and at any given time, the actual will be determined primarily by the supply and demand of the corresponding money.
Remember that the demand for one currency means the supply of another, and similarly, when you supply one currency means the demand for another currency.
The following factors affect the supply and demand of money and thus the exchange rate.
When the intervention is considered to be effective and the outcome will be consistent with the government’s monetary policy, the central bank‘s participation in the market will affect the exchange rate.
The central bank’s involvement is usually done by buying or selling the local currency to stabilize it at a level considered true and desirable.
The exchange rate is also influenced by the judgments of other market participants about the impact of the government’s monetary policy on the exchange rate and their expectations for future policy.
If the global situation becomes more tense, it will lead to the instability of the foreign exchange market, the abnormal inflow or outflow of some currencies will occur, and the final possible result is the large fluctuation of the exchange rate.
The stability of the political situation is related to the stability of the currency. Generally speaking, the more stable the political situation of a country is, the more stable the currency will be.
The influence of political factors on exchange rate can be illustrated by some examples.
At the end of 1987, in order to maintain the basic stability, the finance ministers and central bank governors of the seven Western countries issued a joint statement on December 23, 1987, and started to carry out large-scale joint intervention in the foreign exchange market on January 4, 1988. They sold and purchased dollars in large quantities, thus making the exchange rate of the US dollar recover.
Maintain the basic stability of the dollar exchange rate.
Example 2: If you have been paying attention, you must have noticed that during the Kosovo war, the exchange rate fell by 10% for three consecutive months. One of the reasons was that the Kosovo war put downward pressure on the euro.
The balance of payments situation of a country will lead to the fluctuation of its currency exchange rate.
The balance of payments is a summary of all the external economic and financial relations of the residents of a country.
The balance of payments of a country reflects the country’s economic status in the world, but also affects the country’s macro and micro economic operation.
The influence of the balance of payments is ultimately the influence of the supply and demand of foreign exchange on the exchange rate.
Income in foreign exchange is generated by an economic transaction (e.g., exports) or a capital transaction (e.g., investment by foreigners in the country).
Since foreign exchange is usually not freely circulated in the home market, it is necessary to put the currency of the home country into domestic circulation.
This forms the foreign exchange supply in the foreign exchange market.
Foreign exchange expenditure is caused by an economic transaction (such as imports) or capital transaction (investment abroad).
There is a need for foreign exchange in the foreign exchange market because it is necessary to convert domestic currency into foreign currency in order to meet the respective economic needs.
When these transactions are taken together and recorded in the balance of payments statistics, they constitute a country’s foreign exchange balance.
If the foreign exchange income is greater than the expenditure, the supply of foreign exchange increases.
If the foreign exchange expenditure is greater than the income, the demand for foreign exchange increases.
The increase of foreign exchange supply, under the condition of constant demand, directly causes the price of foreign exchange to fall, and the value of domestic currency to rise accordingly;
When the demand for foreign exchange increases, under the condition of constant supply, the price of foreign exchange rises directly, and the value of domestic currency falls accordingly.
4 When the dominant interest rate of one country rises or falls relative to the interest rate of another country, currencies with low interest rates will be sold and currencies with high interest rates will be bought in pursuit of higher returns on funds.
As demand for a currency with a relatively high interest rate increases, it will appreciate against other currencies.
Let’s look at an example to explain how interest rates affect exchange rates: Suppose there are two countries, A and B, neither of which are in practice, and capital can flow freely between them.
As part of Country A’s monetary policy, interest rates were raised by 1%.
At the same time, interest rates in country B are unchanged.
There is a huge amount of short-term hot money in the market, which is always moving from country to country in search of the best interest rate.
When other things remain the same and country A’s main interest rate rises, A huge amount of short-term hot money will flow into country A in pursuit of higher interest rates.
When hot money flows out of country B, huge amounts of Country B’s currency are sold to exchange for Country A’s currency.
So the demand for country A’s currency increases, and the result is that country A’s currency strengthens relative to country B’s currency.
The above example is the case between two countries, in fact, in today’s international market, it also applies to the global scale.
For years, the free flow of money and the elimination of exchange controls were the order of the day.
This trend has greatly facilitated the free flow of international short-term hot money (sometimes called “”).
It should be noted that investors will only move money to a region or country with higher interest rates if they believe that exchange rate movements will not offset the returns from higher interest rates.
The foreign exchange market does not always follow a logical pattern of movement.
Hard-to-understand factors, such as personal feelings, judgment, and analysis and understanding of various global political and economic events, all influence exchange rates.
Operators in the market must correctly understand the various reports or data published, such as foreign exchange balance data, inflation indicators, economic growth rates, etc.
But in fact, before the report or data is released to the market, the market will already have an expectation or judgment about the substance of the report or data.
This expectation or judgment will be priced in before it is reported or the data becomes public.
Once there is a real report or data that is different from people’s expectations or judgments, it will lead to large fluctuations in the exchange rate.
It is not enough to understand a variety of economic indicators and data correctly.
He needs to know exactly what the market is expecting and judging from unpublished indicators and data.
Speculation by major market operators is also an important factor affecting exchange rates.
The proportion of transactions directly linked to international trade in the foreign exchange market is relatively small.
Most transactions are speculative in nature, and this speculation will lead to the movement of different currencies, which will have an impact on exchange rates.
When people analyze the factors that affect the exchange rate and conclude that a certain rise will occur, they rush to buy it, and the currency’s rise becomes a reality.
On the other hand, when people expect a currency to fall, they sell it, pushing it down.
For example, for a period after the Second World War, due to the political stability of the United States, the economic operation was good and low, while the economic growth reached an annual average of 5% in the early 1960s. At that time, all countries in the world were willing to use the dollar as the means of payment and store their wealth, so that the exchange rate of the dollar continued to rise.
However, in the late 1960s and early 1970s, the value of the dollar plummeted due to the Vietnam War, Watergate scandal, severe inflation, increased tax burden, trade deficit, and declining economic growth rate.
