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What impact does a rising exchange rate have on us?

TIME | 11 May 2022

There is still adjustment pressure on the RMB in the short term. According to the content of the interest rate parity theory, the difference between the interest rates of the two countries is equal to the difference between the forward exchange rate and the spot exchange rate. In the case of differences in interest rates between the two countries, funds will flow to countries with high interest rates to earn interest differentials, but since different countries are involved, the risk of exchange rate changes must also be considered. This is the content of traditional interest rate parity theory and does not take into account the role of expectations.


In fact, interest rate adjustment expectations will also affect this channel. When a currency is expected to appreciate, it will break the original exchange rate balance pattern, and funds will also flow to the country, causing the currency's spot exchange rate to rise.


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Advantages:


1. It is beneficial to increase my country's exports to the United States.

2. It is beneficial to reduce the import cost of energy and resource products, increase the import quantity, and relieve the pressure of domestic energy resources and environment.

3. It is conducive to creating an environment for RMB to “go global” and accelerate the process of RMB internationalization.


Downside:


1. Increase the uncertainty of global economic recovery and affect the external environment of my country's economic development.


2. It may lead to regional financial turmoil or even a crisis, which in turn affects the domestic financial stability of my country.


3. From a long-term perspective, the strengthening of the US dollar exchange rate will bring depreciation pressure to the RMB.


4. Promoting the return of international capital to the United States, affecting my country's attraction of foreign direct investment (FDI).


5. Increase my country's export pressure to markets other than the United States.


6. Increase the dollar-denominated debt burden of domestic enterprises and increase the bad debt rate of banks.


7. Increase the downward pressure on the prices of domestic industrial means of production, and increase the risk of deflation.


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