China Financial Daily

Exchange rate of RMB against the U.S. dollar foreign exchange into the 6.5 era
The People’s Bank of China authorized China Foreign Exchange Trade Center to issue: January 13, 2011 RMB exchange rate for 1 U.S. dollar against 6.5997 yuan, 1 euro against 8.6684 yuan, 100 Japanese yen against 7.9438 yuan, a Hong Kong dollar against 0.84907 yuan, 1 pound against 10.3978 yuan, 1 yuan against 0.46295 ringgit, one yuan against 4.5724 Russian ruble.

Euro exchange rate continued to fall
European bonds because of the continuing concerns, the euro exchange rate all the way down the past two months, by the exchange rate will, Europe has once again become a “cheap” popular choice for luxury goods.

Impact of Monetary policy and fiscal policy on the exchange rate
In understanding the monetary and fiscal policies on the exchange rate impact, we first analyze the commodity market to reach equilibrium, the amount of goods and exchange rate relationships.

When the national rate (P) and foreign price level (PH) is constant, the price level of domestic currency devaluation (E up), so that their goods cheaper relative to foreign goods, exports increased, resulting in domestic demand (D) increased Output (Y) also increased.

If the exchange rate depreciation, increased from e0 to e1, the increased demand for the commodity market to make a balanced output (Y) must also increase, GNP increased from Y0 Y1. Exchange rate appreciation, while the opposite result.

Look at the foreign price level (PH) changes. If the PH increased, domestic goods are relatively cheap, stimulating exports and help to improve the level of domestic GNP. Conversely, if the domestic price level (P) increase in the relative prices of domestic goods more expensive, detrimental to the export, demand will decline, the economy may decline. It can be seen in the foreign price level (PH) increased, the domestic price level (P) decreased, and the devaluation of their currencies, even if the exchange rate will stimulate the increase in GNP.

Now, we analyze the asset market equilibrium. Asset market equilibrium conditions by two components:

(1) the foreign exchange market equilibrium: R = RH-(EeAE) / E, the interest rate parity condition

(2) Money market equilibrium: Ms / P = L (R, Y), the money supply is equal to the demand for money

When these two conditions are met, the asset market to reach equilibrium. With this balance, we can analyze monetary and fiscal policies affect the exchange rate.

1. The impact of monetary policy on exchange rates

Mainly in the form of monetary policy changes in the economy money supply. When the money supply changes, interest rates also change. Monetary policy, money supply changes are major. Although it is mainly based on interest rates to determine their own economic behavior, but in the analysis, the interest rate is only an intermediate variable. This shows that the increase in money supply will cause currency depreciation.

Why will cause devaluation of the currency? The reason is interest rates. In the GNP and the price level (P) unchanged, that demand for money remains unchanged, the increase in money supply will cause interest rates. We know from the theorem of interest rate parity, a result of falling interest rates relative to foreign currencies local currency. Conversely, if money supply is reduced, the exchange rate will appreciate.

2. The impact of fiscal policy on exchange rates

Mainly in the form of fiscal policy changes in government spending and taxation levels. Tax changes, changes in government spending can be included in the analysis together.

When government spending increases, the currency would rise, but also because interest rates. Increase in government spending, the demand for money increased accordingly. If the money supply unchanged, have increased the demand for money can cause interest rates to rise, which is the exchange rate appreciation.

Comparison, although the expansionary fiscal and monetary policy can stimulate the economy and increase output. However, monetary policy and fiscal policy on the national currency has a different role: monetary expansion of the currency devaluation, and fiscal expansion to currency appreciation.