Factors affecting exchange rate fluctuations |Fundamentals of Foreign Exchange Trading

There are many factors that affect exchange rate fluctuations, but in summary, there are mainly the following:


The economic growth rate of a country is the most fundamental factor affecting exchange rate fluctuations. According to the macroeconomic theory of the Keynesian school, the growth of gross domestic product will lead to an increase in national income and expenditure. An increase in income will lead to an expansion in demand for imported products, which in turn will expand the demand for imported productsforeign exchangeThe demand is driving the depreciation of the local currency. The growth of expenditure means an increase in social investment and consumption, which is conducive to promoting the development of production, improving the international competitiveness of products, and stimulating exports to increase foreign exchange supply. So in the long run, economic growth will lead to currency appreciation. From this perspective, the impact of economic growth on exchange rates is complex. But if we consider the role of currency preservation, exchange psychology has another explanation. The value of currency depends on the subjective evaluation of currency by both the supply and demand sides of foreign exchange, and the comparison of this subjective evaluation is the exchange rate. If a country's economic development trend is good, the subjective evaluation is relatively high, and the country's currency is strong.


The balance of international payments is the most direct factor affecting exchange rates. The so-called balance of payments, in simple terms, refers to the import and export of goods and services, as well as the input and output of capital. If exports exceed imports and capital flows into the international balance of payments, it means that the demand for the country's currency in the international market increases, and the domestic currency will rise. On the contrary, if imports exceed exports and capital flows out, the demand for the country's currency in the international market will decrease, and the local currency will depreciate.


The difference between price levels and inflation levels is fundamentally determined by the actual value represented by the currency under the paper currency system. According to purchasing power evaluation, the ratio of currency purchasing power is the exchange rate of currency. If a country's price level is high and inflation rate is high, it indicates a decrease in the purchasing power of its currency, which will lead to its depreciation. On the contrary, it tends to appreciate in value.


Some scholars believe that the impact of interest rates on exchange rates is mainly achieved through their impact on arbitrage capital flows. Under mild inflation, higher interest rates attract foreign capital inflows, while suppressing domestic demand and reducing imports, leading to an increase in the domestic currency. But under severe inflation, there is a negative correlation between interest rates and exchange rates.


People's psychological expectations are particularly prominent in the current international financial market. Exchange psychology believes that foreign exchange rates are a concentrated reflection of the subjective psychological evaluation of currency by both the supply and demand sides of foreign exchange. If the evaluation is high and the confidence is strong, the currency will appreciate. This theory has played a crucial role in explaining countless short-term or extremely short-term exchange rate fluctuations.


In addition, factors that affect exchange rate fluctuations include government 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.