Is an important economic lever, and its changes can have a negative impact on the economy, import and export, prices, capital flows and output.
Generally speaking, the decline of the exchange rate of domestic currency, that is, the depreciation of the foreign currency‘s value, can promote export and inhibit import. If the rise of the exchange rate of domestic currency, that is, the rise of the foreign currency’s value, it is conducive to import but not conducive to export.
In addition, exchange rate changes affect import and export, and demand for import and export is also required to have price elasticity — import and export demand is sensitive to exchange rate and commodity price changes, that is, demand elasticity is large, and then the change of transaction quantity will be caused by price changes.
Of course, for export commodities, there is also a problem of export supply elasticity, that is, whether the export commodities can increase after the exchange rate drops is also restricted by the possible extent of the expansion of commodity supply.
In terms of imported consumer goods and raw materials, a fall in the exchange rate causes the domestic price of imported goods to rise.
The extent to which it affects the overall price index depends on the share of imported goods and raw materials.
On the contrary, the appreciation of domestic currency, other conditions unchanged, the price of imported goods is likely to decrease, which can play a role in suppressing the overall price level.
From the perspective of export commodities, the decline of exchange rate is conducive to the expansion of export, but in the case of small supply elasticity of export commodities, export expansion will cause the domestic market to snap up export commodities and thus raise the domestic purchase price of export commodities, and may even affect the overall level of domestic prices.
Since long-term capital flows mainly transfer profits and risks, they are less affected by exchange rate changes, but short-term capital flows are often more affected by exchange rates.
Under the trend of depreciation of domestic currency against foreign currency, domestic and foreign investors are unwilling to hold various financial assets denominated in domestic currency, and will convert them into capital outflow.
At the same time, due to the conversion of foreign exchange in succession, the tension between the supply and demand of foreign exchange will be aggravated, and the exchange rate of domestic currency will fall further.
On the contrary, it may cause the inward flow of capital, prompting the exchange rate of the local currency to rise further.
If the financial system is not sound, the sudden fluctuation of the exchange rate in the short term may cause a financial crisis.
Since exchange rate fluctuations can affect imports and exports, prices and capital flows, it is not difficult to see that they will also have an important effect on a country’s output and employment.
When the exchange rate is conducive to stimulating exports and inhibiting imports, the growth of export production and the growth of import substitutes will lead to the expansion of the total production scale and the improvement of employment level.
At the same time, the growth of the production of export goods and import substitutes will lead to the expansion of the overall scale of production and the improvement of the level of employment.
At the same time, rising profits in industries producing export and import substitutes can even lead to changes in a country’s production structure.
Correspondingly, the unfavorable exchange rate will reduce the export rapidly, while the country’s export is related to the overall economic development, bringing great difficulties to production and employment. The unfavorable exchange rate will increase the import, and in serious cases, it will impact the national production and increase the unemployment ranks.
An exchange rate that favours capital inflows is good for countries that are short of capital; an exchange rate that favours capital outflows is desirable for countries with excess capital.
Lack of capital, capital inflow, excess capital, can find favorable investment opportunities, which is undoubtedly conducive to the development of the economy, to promote production and employment.
The New Year will be the market holiday, the Fed is about to start trimming.
Please pay attention to the specific operation, the market is changing rapidly, investment needs to be cautious, the operation strategy is for reference only.
