How Exchange Rate and Interest Rate Affect Hong Kong Market

On July 21, 2005, China revalued its decade-long quasi-fixed exchange rate of approximately 8.28 yuan per U.S. dollar by 2.1% to 8.11. Simultaneously, the People’s Bank of China announced that the daily trading band of 0.3% against the dollar would be maintained. Many analysts and economists believed that the real trade-weighted value of the renminbi was undervalued by up to 30% to 35%.

Wong (2009) found that there exists a long-run relationship between real exchange rate and terms of trade in Malaysia and Thailand and also variation in real exchange rate is mostly explained by the movements in terms of trade. Bashir and Luqman (2014), however, concluded that terms of trade depreciates real exchange rate of Pakistan in the long run.

During the second half of 1997, currencies and stock market prices plunged in value across Southeast Asia, beginning in

Introduction: What factors affect the demand and supply of Australian dollars in the foreign exchange markets? Distinguish between the possible causes and effects of currency depreciation and a currency appreciation on the Australian economy. What forces have come into play, if any, in the past four months that have affected the value of the Australian dollar?

dollar. Changes in U.S. interest rates and the dollar are tied to several economic indicators domestically and around the world including; the credit market, commodities, stocks and investment opportunities.

The American dollar rate can reveal the value of dollar compared to other countries. For example,

China, the largest growing market in the world, currently has a policy regarding monetary regulation that allows the Yuan to “float”. This has seen the Yuan appreciate by approximately 24% over the past few years. Today, the exchange rate between the Chinese Yuan and the American Dollar is approximately 6.3 Yuan to 1 Dollar. Some argue that China should revalue the Yuan again the dollar, establishing a more fixed exchange rate. Others believe that current should allow

Hard peg – a guarantee of a fixed exchange rate –weakens incentives for governments to make fiscal system more robust, because the hard peg makes it easier for governments to borrow foreign funds, thus allowing them to delay necessary reforms to fix fiscal imbalances. On the other hand exchange rate peg promotes openness to trade and economic integration. An exchange rate fixed to the U.S. dollar will likely promote trade with the United States and other countries tied to the U.S. dollar.

In the past years, the economy in China has grown at a considerably high rate averaged at nearly 10% annually. Due to this enormous growth, China now influences the economy of virtually every country all over the world. This is more apparent and frightening, considering the United States economic relationship with China. Until 2005, China pegged its currency to the U.S. dollar, but as from July 2005, it linked its currency to other currencies rather than dollars and let its currency appreciate by 2.1%. The central bank of China did this by buying and selling the dollar dominated assets in exchange of printed Yuan in order to eliminate excess supply or demand for the Yuan. Due to this, the exchange rate between the dollar and the Yuan, basically, remained constant irrespective of changes in economic factors which could have otherwise destabilized the Yuan relative to the dollar.

In looking at the above figures 1 and 2, at a glance there seems to be an inverse relationship between the Japanese Yen and the Chinese Yuan Renminbi (Yuan) with the exception of January through April. However, in general as Japan’s currency strengthens against the dollar, China’s currency weakens against the dollar. If the exchange rate ultimately reflects the amount of goods and services one country can buy relative to another country; China’s purchasing power is slowly slipping away while Japan’s is increasing at rates not seen in quite some time. While one might look at the above charts and think that there is a direct correlation, the truth is much more complicated. In theory it should be relatively simple to state a clear reasoning behind such patterns. As a global economy it becomes much more difficult to look at two countries in relation to a third, and infer a direct correlation. Either way, there is an interconnectedness and many are theorizing about the causes; as well as attempting to look at patterns in relation to historical events in order to forecast the future rates.

Monetary  Policy  and  Nominal  Exchange  Rates     1.     a)   Federal   Open   Market   Committee   used   to   maintain   a   steady   increase   of   the   Federal  Reserve’s  balance  sheet  based  on  a  policy  of  quantitative  easing,  which   involves  buying  a  considerable  amount  of  assets,  in  order  to  increase  the  money   supply,  but  it  decided  to  reduce  the  pace  of  new  purchases  of  assets,  as  a  reaction   to  the  recent  economic  growth.  With  this  policy,  FED  will

Interest rate is considered as one of the main parameters to control the economic conditions of any country. Interest rate is the key variable for time value of money, which causes a greater shift in money markets and capital markets. This study is basically carried out for the capital market or stock market.

So it is easy to conclude that china’s economic markets are sluggish and weak, for these reasons, China should adopt this monetary strategy to deal with these series of problems, and keeping the healthy and steady growth in economic markets. On the other hand, China wanted to increase the monetary (Yuan) liquidity, further, wanted Yuan to become international reserve-currency. Broadly speaking, China hoped to consolidate its central position in the global economic markets. In conclusion, pulling the healthy and steady growth internally and pushing Chinese monetary (Yuan) circulate in the international economic market, externally are the two key factors drove China to devalue Yuan.

In the 11 years, the international economic situation has undergone great changes; pegging the RMB exchange rate formation mechanism type has become increasingly unsuited to China 's economic reform and development requirements. It is demonstrated by the defects are:

The report bases on the theories of relative cost of production and the relative wealth effect analyzes the potential impact caused by exchange rate upon foreign direct investment. The target country selected is China; while the research period is identified as 1980 to 2012. In order to undertake the empirical study, the gravity model is referred to when establish the regression model, relying upon the regression results released by Stata. The increase of real exchange rate, i.e. the appreciation of RMB will restrict the inflow of foreign direct investment. Furthermore, the GDP will positively affect the level of foreign direct investment; while the average domestical wage will negatively impact the level of foreign direct investment. In addition, the policy change will generate a dramatic influence upon the level of foreign direct investment and thus has to be taken into deep consideration when the regression analysis is undertook.