Exchange rates
| English | Chinese | Pinyin |
|---|---|---|
| exchange rate | 汇率 | huì lǜ |
| floating | 浮动的 | fú dòng de |
| fixed | 固定的 | gù dìng de |
| appreciation | 升值 | shēng zhí |
| depreciation | 贬值 | biǎn zhí |
| speculation | 投机 | tóu jī |
The price of money itself
- Travel abroad and your money is suddenly worth more or less — because currencies have a price too, the exchange rate 汇率.
- It quietly shapes the price of every import and export, and so the whole trade balance.
A floating exchange rate is determined by:
Floating rates are set by forex demand and supply; fixed rates are pegged by the central bank.
Floating 浮动的 vs fixed 固定的
- A floating exchange rate is set by the demand for and supply of the currency on the forex market.
- A fixed rate is pegged by the central bank, which buys/sells currency to hold it.
In a floating system, the demand for and supply of the currency set the exchange rate where they cross.
The foreign-exchange market
A currency has its own market. More demand for £ (or less supply) pushes the exchange rate up — it appreciates.
A depreciation of the currency makes:
A weaker currency cuts export prices abroad and raises import prices at home.
SPICED reminds you that a Strong Pound makes Imports Cheaper and Exports Dearer.
Strong Pound → Imports Cheaper, Exports Dearer (appreciation).
Appreciation 升值 and depreciation 贬值
- Appreciation (rate rises): exports dearer, imports cheaper.
- Depreciation (rate falls): exports cheaper, imports dearer — can improve the trade balance.
- A handy memory aid: SPICED — Strong Pound, Imports Cheaper, Exports Dearer.
Worked example. If 1 pound = 1.30 dollars, then 200 pounds buys 200 × 1.30 = 260 dollars.
If 1 pound = 1.30 dollars, how many dollars do you get for 200 pounds?
200 × 1.30 = 260 dollars.
What moves a floating rate
- Demand for exports (raises demand for the currency), interest rates (higher rates attract savers), investment inflows, and speculation 投机.
Higher domestic ______ rates attract foreign savers, raising demand for the currency.
Higher interest rates attract capital inflows, appreciating the currency.
You've got it
- a floating rate is set by currency demand and supply; a fixed rate is pegged by the central bank
- appreciation → exports dearer, imports cheaper; depreciation → the reverse (SPICED)
- a floating rate moves with exports demand, interest rates, investment and speculation