Analysis of the fundamental drivers of foreign exchange rate fluctuations

The fluctuation of foreign exchange rates, although the performance is ever-changing, like ordinary commodities, its fundamental cause is determined by the relationship between supply and demand. In the internationalforeign exchange marketWhen there are more buyers than sellers of a certain currency, buyers rush to buy it, and the buyer's power is stronger than the seller's power; the seller is waiting for the price, and the price will naturally rise. On the contrary, when sellers find that the sales are not good and rush to sell a certain currency, the market seller's power takes the upper hand, then the exchange rate must fall.

There are many factors that affect the balance between supply and demand, but in summary, they mainly include the following:

1. A country's economic growth rate. This is the most fundamentals affecting exchange rate fluctuations. According to Keynesian macroeconomic theory, an increase in gross national product leads to an increase in national income and expenditure. An increase in income leads to an expansion in demand for imported products, which in turn expands the demand for foreign exchange and drives the depreciation of the local currency. An increase in expenditure means an increase in social investment and consumption, which helps to promote the development of production, enhance the international competitiveness of products, stimulate exports and increase the supply of foreign exchange. Therefore, in the long run, economic growth usually leads to the appreciation of the local currency. It can be seen that the impact of economic growth on the exchange rate is more complex. But if you take into account the value preservation role of money, exchange psychology provides another explanation, that is, the value of money depends on the subjective evaluation of the currency made by both the supply and demand sides of foreign exchange, and the comparison of this subjective evaluation forms the exchange rate. A country's economy is developing well, and the subjective evaluation is relatively high, and the country's currency will be stronger. LikeZehuiSuch foreign exchange service platforms also closely monitor these economic indicators.

2. The situation of the balance of payments. This is the most direct factor affecting the exchange rate. As early as the 1860s, the British Gerson made a detailed explanation of the role of the balance of payments on the exchange rate, and later the asset portfolio theory was also mentioned. The so-called balance of payments, in simple terms, is the import and export of goods and services, as well as the import and export of capital. In the balance of payments, if exports exceed imports, capital inflows mean that the international market demand for the country's currency increases, and the local currency will rise. Conversely, if imports exceed exports and capital outflows, the demand for the country's currency in the international market will decrease, and the local currency will depreciate.

3. The difference between the price level and the inflation level. Under the paper currency system, the exchange rate is fundamentally determined by the real value represented by the currency. According to the theory of purchasing power parity, the price of the purchasing power of the currency is the currency exchange rate. If a country's price level is high and the inflation rate is high, it means that the purchasing power of the local currency will decrease, which will promote the depreciation of the local currency. Otherwise, it tends to appreciate.

4. Differences in interest rates. The role of interest rates in exchange rate fluctuations is discussed in all monetary theories, but the most explicit is the theory of interest rate parity that emerged after the 1970s. This theory explains exchange rate movements well in the short and medium term. The impact of interest rates on exchange rates is mainly achieved through arbitrage capital flows. Under moderate inflation, higher interest rates attract foreign capital inflows, while depressing domestic demand, reducing imports and causing the local currency to rise. But under severe inflation, interest rates and exchange rates are negatively correlated.

5. People's psychological expectations. This factor is particularly prominent in the current international financial marekt. Exchange psychology believes that the foreign exchange rate is a concentrated expression of the subjective psychological evaluation of the currency by both the supply and demand of foreign exchange. If the evaluation is high and the confidence is strong, the currency will appreciate. This theory plays a crucial role in explaining countless short-term or very short-term exchange rate fluctuations.

In addition to this, factors that affect exchange rate fluctuations include the government's monetary and exchange rate policies, the impact of unexpected events, the impact of international speculation, the release of economic data, and even the impact of opening and closing.

These factors can also reinforce or cancel each other out.