Floating exchange rate is the fixed exchange rate symmetry. Based on market supply and demand and free up or down, the monetary authorities not to interfere in the exchange rate. With floating exchange rates, gold parity has lost practical significance, since the official exchange rate is only a reference. The floating form, if the government intervention on exchange rate fluctuations are not entirely left to supply and demand determine the exchange rate, referred to as free-floating or clean floating. However, governments in order to maintain exchange rate stability, or for some political and economic purposes, to make the exchange rate up or down, more or less the volatility of the exchange rate interventions. This floating exchange rate in the international arena known as managed floating or dirty floating. 1973 after the collapse of fixed exchange rate system, the Western countries generally floating exchange rate system.
Floating exchange rate - the main features
First, exchange rate fluctuations in various forms,
Including a free floating exchange rate float, managed float, pegged to floating, single floating, floating, etc. combined. Second, the floating exchange rate system, not a pure free-floating exchange rate, government rate when necessary, will be overt or covert intervention. Third, due to exchange rate changes are determined by market supply and demand conditions, so a floating exchange rate than a fixed exchange rate fluctuations to be frequent, and large amplitude. Fourth, the SDR currency basket exchange rate as part of a system.
A managed floating exchange rate system is that a country's monetary authorities in accordance with their economic interests, to intervene in the foreign exchange market from time to time to make their exchange rates down towards the direction conducive to their exchange rate regime. In a managed floating exchange rate system, the monetary authorities to determine the exchange rate to fluctuate within the range. Helps to eliminate short-term floating range of factors, when the range of exchange rate fluctuations still can not eliminate the impact of short-term factors on the exchange rate, the central bank to conduct foreign exchange market intervention in order to eliminate short-term factors.
Floating point of view, a floating exchange rate fluctuations can be divided into separate and joint float. Single floating exchange rate a country's own currency fluctuations, changes in the exchange rate has nothing to do with the other currencies. The joint float is implemented in several countries under the conditions of an economic union, exchange rate fluctuations made of differentiated arrangements. Internally, the participating countries for the economic integration of several provisions of their center of currency exchange rates, currency exchange rate fluctuations between them can not exceed a certain range; over a certain range, to participate in the joint float of the country's central bank to intervene. Externally, these countries are unified floating exchange rate. In addition to the above two floating way, there is a floating peg, referring to some countries due to historical reasons or the need for the import and export trade structure, the national currency's exchange rate with one or a few key currencies, and then with the currency exchange rate fluctuations.
Floating exchange rate - the difference analysis
Floating exchange rate system can be divided into free-floating exchange rate regime and a managed floating exchange rate regime two.
Floating exchange rate is freely floating exchange rate system, monetary authorities rarely intervene in the foreign exchange market, exchange rate changes with market supply and demand. The disadvantage of this system is the nominal (and real) exchange rate fluctuations may distort the allocation of resources, the randomness of the exchange rate and inflation bias larger. A managed floating exchange rate system refers to the monetary authorities through a variety of measures and means to intervene in the foreign exchange market to the exchange rate to the benefit of the direction of change in their economic development. Although the monetary authorities intervene in the foreign exchange market, but not to defend any definite parity, the frequency of intervention according to the exchange rate goals. A managed floating exchange rate system has the advantage of avoiding excessive exchange rate fluctuations, the main drawback is that the central bank's behavior is sometimes a lack of transparency may cause some uncertainty.
In the current international monetary system, most countries are implementing a managed floating exchange rate system. A managed floating exchange rate is market-based exchange is floating, not fixed; it with free-floating exchange rate difference is that it is subject to the management of macro-control, that monetary authorities in the foreign exchange market the exchange rate announced the formation of prices, allowing it to float within the range specified fluctuate. Once the floating exchange rate exceeds the rate, the monetary authorities will trade foreign exchange market to maintain a reasonable and relatively stable exchange rate.
Floating exchange rate system can be divided into free-floating exchange rate regime and a managed floating exchange rate regime two.
Floating exchange rate is freely floating exchange rate system, monetary authorities rarely intervene in the foreign exchange market, exchange rate changes with market supply and demand. The disadvantage of this system is the nominal (and real) exchange rate fluctuations may distort the allocation of resources, the randomness of the exchange rate and inflation bias larger. A managed floating exchange rate system refers to the monetary authorities through a variety of measures and means to intervene in the foreign exchange market to the exchange rate to the benefit of the direction of change in their economic development. Although the monetary authorities intervene in the foreign exchange market, but not to defend any definite parity, the frequency of intervention according to the exchange rate goals. A managed floating exchange rate system has the advantage of avoiding excessive exchange rate fluctuations, the main drawback is that the central bank's behavior is sometimes a lack of transparency may cause some uncertainty.
In the current international monetary system, most countries are implementing a managed floating exchange rate system. A managed floating exchange rate is market-based exchange is floating, not fixed; it with free-floating exchange rate difference is that it is subject to the management of macro-control, that monetary authorities in the foreign exchange market the exchange rate announced the formation of prices, allowing it to float within the range specified fluctuate. Once the floating exchange rate exceeds the rate, the monetary authorities will trade foreign exchange market to maintain a reasonable and relatively stable exchange rate.
Floating exchange rate - a basic introduction:
Floating exchange rate system, refers to a country's monetary authorities no longer requires parity in national currency and foreign currency and exchange rate volatility, monetary authorities do not assume the obligation to limit exchange rate fluctuations, and allow the exchange rate with the foreign exchange market supply and demand fluctuations in a free exchange rate system.
Global financial system after March 1973, the center of the U.S. dollar fixed exchange rate system would cease to exist, and was replaced by a floating exchange rate system. A floating exchange rate system in the country, mostly the world's major industrial countries like the United States, Britain, Germany, Japan and most other countries and regions are still pegged exchange rate system, most of its currency pegged to the dollar, Japanese yen, French franc and so on. In a floating exchange rate system, the national currency under the original statutory gold content entered into with other countries, or notes of gold parity, it does nothing, so, the state tends to complicate the exchange rate system, market-oriented.
In a floating exchange rate system, countries no longer requires the magnitude of the exchange rate fluctuations, the central bank no longer bear the obligation to maintain the upper and lower volatility, countries in the exchange rate is based on the foreign exchange market foreign exchange supply and demand, self-floating and adjusted results. At the same time, a country's international balance of payments caused by changes in foreign exchange supply and demand are the main factors affecting the exchange rate change - the balance of payments surplus countries, to increase the supply of foreign exchange, foreign currency prices, the exchange rate to float downward; balance of payments deficit of the country, the increased demand for foreign exchange, foreign currency prices, the exchange rate float. Exchange rate fluctuations in the foreign exchange market is a normal phenomenon, a country's currency to float, currency appreciation, is the depreciation rate to fall. It should be said, a floating exchange rate system is a fixed exchange rate system progress. With the global continuing reform of the international monetary system, the International Monetary Fund on April 1, 1978 to modify "the International Monetary Fund" provision came into effect, the implementation of "managed floating exchange rate system." Since the new exchange agreement allows countries to the choice of exchange rate regime has a strong degree of freedom, so now a variety of countries to implement the exchange rate regime, there is a separate floating, floating peg, flexible floating, floating, and so the joint.
Global financial system after March 1973, the center of the U.S. dollar fixed exchange rate system would cease to exist, and was replaced by a floating exchange rate system. A floating exchange rate system in the country, mostly the world's major industrial countries like the United States, Britain, Germany, Japan and most other countries and regions are still pegged exchange rate system, most of its currency pegged to the dollar, Japanese yen, French franc and so on. In a floating exchange rate system, the national currency under the original statutory gold content entered into with other countries, or notes of gold parity, it does nothing, so, the state tends to complicate the exchange rate system, market-oriented.
In a floating exchange rate system, countries no longer requires the magnitude of the exchange rate fluctuations, the central bank no longer bear the obligation to maintain the upper and lower volatility, countries in the exchange rate is based on the foreign exchange market foreign exchange supply and demand, self-floating and adjusted results. At the same time, a country's international balance of payments caused by changes in foreign exchange supply and demand are the main factors affecting the exchange rate change - the balance of payments surplus countries, to increase the supply of foreign exchange, foreign currency prices, the exchange rate to float downward; balance of payments deficit of the country, the increased demand for foreign exchange, foreign currency prices, the exchange rate float. Exchange rate fluctuations in the foreign exchange market is a normal phenomenon, a country's currency to float, currency appreciation, is the depreciation rate to fall. It should be said, a floating exchange rate system is a fixed exchange rate system progress. With the global continuing reform of the international monetary system, the International Monetary Fund on April 1, 1978 to modify "the International Monetary Fund" provision came into effect, the implementation of "managed floating exchange rate system." Since the new exchange agreement allows countries to the choice of exchange rate regime has a strong degree of freedom, so now a variety of countries to implement the exchange rate regime, there is a separate floating, floating peg, flexible floating, floating, and so the joint.
Refers to a single floating currency without any currency with fixed exchange rate, the exchange rate based on market supply and demand to determine, at present, including the United States, Britain, Germany, France, Japan etc., more than 30 countries with a separate float. Variable refers to a country's currency peg with another currency to maintain a fixed exchange rate, followed by those floating and floating. In general, countries with unstable currency can be pegged to a stable currency to restrain domestic inflation, improving monetary credibility. Of course, the use of floating peg in a way which would subject the country's economic development was pegged to the country's economic situation, and thus suffer. Currently there are about 100 countries around the world or regions using floating peg method. Flexible floating refers to a country according to their own development needs of the pegged exchange rate flexibility in a certain range of free float, or a set of economic indicators to adjust the exchange rate, floating exchange rate peg in order to avoid defects, access to foreign exchange management, monetary policy in more autonomy. Currently, Brazil, Chile, Argentina, Afghanistan, Bahrain and other countries with flexible floating mode. Floating is a joint group of countries within the currency of the member states to implement a fixed exchange rate, foreign currency is the implementation of the Joint Group floating exchange rate. European Union (EU) 11 countries in 1979 established the European Monetary System, established the European Currency Unit (ECU), linked with the establishment of national currency exchange rate parity, and parity composition network, fluctuations in national currencies must be kept in the range of provisions , the warning line once more than exchange rate fluctuations, the countries concerned to jointly intervene in the foreign exchange market. 1991 the EU signed the "马斯赫特里特 Treaty", the development of the European monetary integration process table, January 1, 1999, the euro was officially launched, the European monetary integration can be achieved, the EU such regional currency Group has emerged.
In a floating exchange rate system, exchange rate volatility much higher than the fixed exchange rate system. In a floating exchange rate system, exchange rate volatility significantly more than the basic economic factors determine the exchange rate (such as price level, income level, money supply) magnitude of change. In a floating exchange rate system, the exchange rate not only in the very short term volatility, but in the long term volatility is also high. From a different point of view, the floating exchange rate system, exchange rate volatility significantly more than people expected, the traditional exchange rate determination theory (such as purchasing power parity theory and the interest rate parity theory) has been unable to explain the reality of the exchange rate movement. In this case, there have been various theories to explain the exchange rate determination under floating exchange rates because the exchange rate volatility, so that people on deepening understanding of the exchange rate movement.
The process of integration in the global economy, the dollar in the past dominance of international finance, is a multi-polar development, the international monetary system will provide countries with free floating exchange rate, international reserve diversification, financial liberalization, internationalization trend.
In a floating exchange rate system, exchange rate volatility much higher than the fixed exchange rate system. In a floating exchange rate system, exchange rate volatility significantly more than the basic economic factors determine the exchange rate (such as price level, income level, money supply) magnitude of change. In a floating exchange rate system, the exchange rate not only in the very short term volatility, but in the long term volatility is also high. From a different point of view, the floating exchange rate system, exchange rate volatility significantly more than people expected, the traditional exchange rate determination theory (such as purchasing power parity theory and the interest rate parity theory) has been unable to explain the reality of the exchange rate movement. In this case, there have been various theories to explain the exchange rate determination under floating exchange rates because the exchange rate volatility, so that people on deepening understanding of the exchange rate movement.
The process of integration in the global economy, the dollar in the past dominance of international finance, is a multi-polar development, the international monetary system will provide countries with free floating exchange rate, international reserve diversification, financial liberalization, internationalization trend.
Floating exchange rate - theoretical explanationSince the 1970s, floating exchange rate system of exchange rate volatility of the various interpretations regarded as an asset price, and thus these theories are collectively referred to as the exchange rate determined by the asset market analysis. The exchange rate determined by analysis of asset markets, the starting point is a very simple idea, because the exchange rate is the relative price of two currencies, and therefore by definition, it is an asset price and exchange rate behavior with other asset prices (stocks and bond prices) behavior is the same. Asset markets, exchange rate variability analysis to a variety of different interpretations.
One is the "expansion effect theory",
Floating exchange rate that is the exchange rate under floating exchange rates as a variable that the expansion effect, the price elasticity of the exchange rate determined by the interpretation of the monetary approach. According to this theory, the exchange rate is the relative price of two currencies, the exchange rate is the money stock and thus the demand and supply decisions. As the demand for money is real income, price level and nominal interest rates of the function, therefore, the exchange rate from the money market equilibrium level of income, price level and interest rate decisions. In the rational expectations conditions, the exchange rate is now expected that all future money supply, income levels, interest rates, prices and other economic fundamentals, "discounted value" and. If economic agents expect future money supply and economic fundamentals such as income level changes, even though the money supply and income levels and other basic economic factors constant, the current exchange rate will change.
The second is the "overshoot effect theory." Overshoot generally refers to the disturbance for a given, a variable short-term response than its long-term response, then the opposite will happen adjustment process. Overshoot mechanism is due to monotonic changes in the oscillation generated effects, the underlying causes of this phenomenon lies in the constantly changing needs of the stock of temporary traffic changes. Overshoot the general characteristics of asset prices, but it is in the foreign exchange market caused the overshoot of attention. Kassel in the 1920s noticed the foreign exchange market overshoot, but no systematic analysis of this phenomenon. The first system of exchange rate overshooting model by a Duo Enbu facilities proposed in 1976, the exchange rate overshooting phenomenon that is basically borrowed from chemistry to pull Charlie Rui theorem. Exchange rate overshooting theory borrows the theorem that the exchange rate overshooting is actually a compensation act, the overshoot models assume some nominal variables are fixed in the short term (or stick to), for example, McKinnon assumed foreign exchange speculative market, lack of adequate funds, Frank said that the new information on the commodity markets and asset markets have different effects, Bronson that asset owners can quickly restore the face of external disturb the balance of their portfolios. In Duoen Bu Shi overshoot model, assuming that short-term prices are sticky, the purchasing power parity does not hold in the short term, therefore, the asset market can be quickly adjusted, and the goods market adjustment is relatively slow economy in the short term adjustment process is through asset prices, ie interest rates and exchange rates carried out. Assume that money supply increases, prices in the sticky conditions, the balance will immediately lead to substantial rise in domestic interest rates decline, while domestic interest rates lead to capital outflows, currency depreciation. As no uncovered interest rate parity condition is always true, and thus domestic interest rates will have a future currency appreciation expectations. For a given expected future appreciation of the currency depreciation rate to be determined by purchasing power parity over the long-run equilibrium value, so, in the short term, the exchange rate exceeds its long-run equilibrium value, but with falling interest rates and currency devaluation, commodity markets there will be excess demand, pushing prices higher level, thus reducing domestic money balances, so that domestic interest rates, capital inflows, currency appreciation, economic system gradually achieve long-term equilibrium level. Therefore, from the general sense, the exchange rate overshooting is for a given external disruption, the response rate in the short term than its long-run equilibrium value, then the opposite will happen adjustment process, the exchange rate eventually returned to the long-run equilibrium value . Therefore, according to overshoot theory, exchange rate volatility of the exchange rate in a dynamic adjustment process in a short-term behavior.
The third is "speculative bubble theory." According to the exchange rate determined by analysis of asset markets, even without the money supply and income levels and other changes in economic fundamentals, as long as the expected change in exchange rates will change. Once out of the basic factors and the exchange rate change is expected to self-reinforcing, the formation of speculative bubbles. Foreign exchange market is a speculative bubble on the basic factors that can not be explained by the exchange rate, speculative market bubble depends on the number of psychological factors. Is a rational speculative bubble in the bubble, if speculators are fully aware of the decision by the economic fundamentals of the market equilibrium exchange rate, even if the exchange rate is now higher than the equilibrium exchange rate, as long as the future exchange rate to compensate for the risks to speculators. Speculators purchase is rational, because he knew one day the price will return to the equilibrium level. If all of the speculators are so expected, then, in each period, there will be a probability of a bubble. Once the bubble, the exchange rate will rise faster and faster, because the exchange rate must rise faster to compensate for the risk borne by speculators. The existence of speculative bubbles, the exchange rate may be completely divorced from economic fundamentals arising from self-strengthening exercises.
The fourth is the "currency substitution theory."
Floating exchange rate currency substitution theory is that the floating exchange rate system, the economic agents for the transaction motive, motivation and prevent speculative motives, will hold foreign currency. Currency substitution arising mainly due to multinational companies in different countries of production and operation, they have strong incentives to diversify their cash balance of composition, in order to facilitate their business in different countries, to reduce transaction costs. Meanwhile, speculators profit by trading currency, they have to hold foreign currency in order to be more liquid foreign capital, it is easy to exchange with other currencies. In addition, central banks with foreign currency holdings of international reserves, used to intervene in the foreign exchange market, exchange rate and macroeconomic stability. Therefore, the floating exchange rate regime, economic agents have an incentive to hold a basket of currencies, in order to reduce exchange rate risks. Various currencies in the currency portfolio in proportion with each of the risks and benefits of a currency to changes, as countries relax foreign exchange controls, currency substitution has become a floating exchange rate system, a universal phenomenon. In the presence of substitution between money and foreign currency, thus increasing the pressure on the currency depreciation and appreciation. The higher the elasticity of currency substitution, the exchange rate more volatile, because the high elasticity of currency substitution in the case, a smaller money supply growth will lead to huge changes in the exchange rate, therefore, an alternative currency exchange rate fluctuations will increase the magnitude of the exchange rate more volatile.
Fifth is "news" theory. Exchange Rate Determination "news" theory, in the foreign exchange market, the new information can cause the expected changes, the expected change will soon be reflected in the exchange rate, therefore, new information on the exchange rate changes have a decisive role in these new Information is the "news", that is, unpredictable events. Common effects of exchange rate changes "news", including the release of economic statistics, political events, a new international monetary arrangements, rumors and so on. As the "news" events can not be expected, therefore, with the "news" linked to exchange rate movements can not be expected, the foreign exchange market depends on the information to reflect this information is not "good" or "bad", but than expected on such information is "better" or "worse", it is expected the information included in the current market exchange rates among the exchange rate is expected to not only respond to the information. For example, when the Government announced the balance of trade and other statistics of the money supply, the market exchange rate does not depend on changes in the size of the statistics themselves, but on these statistics and the difference between people's prior expectations, this "news" will affect the exchange rate changes. Exchange Rate Determination "news" theory reflects the essential characteristics of the exchange rate, exchange rate is an asset price is determined in asset markets, with volatility and unpredictability in the asset market, the current assets reflects the future events expected, the new information it can quickly respond, thus the inherent volatility of the asset price characteristics.
The six "non-rational expectations theory." That theory holds that the foreign exchange market is not all rational expectations, from the foreign exchange market transactions, the actual situation, there is ample evidence that the foreign exchange market on a variety of expectations, according to the U.S. Federal Reserve Bank of New York trading on the foreign exchange market statistics, the world's daily trading volume of foreign exchange up to $ 430 billion, the U.S. Federal Reserve Bank report also showed that only 4.9% of transactions are conducted between non-financial institutions, 4.4% of the transactions between the non-bank , that is, the proportion of importers and exporters is very low. Thus, trading on the foreign exchange market transactions between major banks and trading volume increases, indicating that there are a variety of market expectations, otherwise they would not have such a large volume, so the foreign exchange market is expected to not always rational. In the foreign exchange market, the difference is expected due to different forecasting methods.
Floating exchange rate in the foreign exchange trading, is widely used prediction method based analysis and technical analysis. The so-called fundamental analysis, is by analyzing the underlying factors of exchange rate changes the trend of exchange rate movements speculation, these basic factors, including money supply, interest rates, prices and other factors, a variety of asset markets to exchange rate determination based on the analysis of the forecast are the basis for analysis. Based analysis is based on a given exchange rate model to calculate the equilibrium value of the exchange rate, when the market exchange rate deviation from the equilibrium exchange rate, the base currency analysts expect will eventually return to equilibrium exchange rate, which is a source of exchange rate stability. Technical analysis, also known as chart analysis, is through the analysis of past exchange rate changes to infer the future trend of the exchange rate movement. Chart are often used in analysis methods include moving average, momentum analysis. A common feature of these methods is that when the market indicators (exchange rate index, trading volume or rate of change of a particular exchange rate) rose from a low to a certain percentage, traders expect the exchange rate will continue to rise, when the market index from a high point down to a certain extent, traders expect rates to continue to decline. Chart's expected to be known as the "wave effect in time", which is a source of exchange rate instability, due to technical analysis of the information is only used by past exchange rate changes, and rational expectations require the parties to use all relevant information to predict future exchange rate movements, so the technical analysis of all relevant information to predict future exchange rate movements.
One is the "expansion effect theory",
Floating exchange rate that is the exchange rate under floating exchange rates as a variable that the expansion effect, the price elasticity of the exchange rate determined by the interpretation of the monetary approach. According to this theory, the exchange rate is the relative price of two currencies, the exchange rate is the money stock and thus the demand and supply decisions. As the demand for money is real income, price level and nominal interest rates of the function, therefore, the exchange rate from the money market equilibrium level of income, price level and interest rate decisions. In the rational expectations conditions, the exchange rate is now expected that all future money supply, income levels, interest rates, prices and other economic fundamentals, "discounted value" and. If economic agents expect future money supply and economic fundamentals such as income level changes, even though the money supply and income levels and other basic economic factors constant, the current exchange rate will change.
The second is the "overshoot effect theory." Overshoot generally refers to the disturbance for a given, a variable short-term response than its long-term response, then the opposite will happen adjustment process. Overshoot mechanism is due to monotonic changes in the oscillation generated effects, the underlying causes of this phenomenon lies in the constantly changing needs of the stock of temporary traffic changes. Overshoot the general characteristics of asset prices, but it is in the foreign exchange market caused the overshoot of attention. Kassel in the 1920s noticed the foreign exchange market overshoot, but no systematic analysis of this phenomenon. The first system of exchange rate overshooting model by a Duo Enbu facilities proposed in 1976, the exchange rate overshooting phenomenon that is basically borrowed from chemistry to pull Charlie Rui theorem. Exchange rate overshooting theory borrows the theorem that the exchange rate overshooting is actually a compensation act, the overshoot models assume some nominal variables are fixed in the short term (or stick to), for example, McKinnon assumed foreign exchange speculative market, lack of adequate funds, Frank said that the new information on the commodity markets and asset markets have different effects, Bronson that asset owners can quickly restore the face of external disturb the balance of their portfolios. In Duoen Bu Shi overshoot model, assuming that short-term prices are sticky, the purchasing power parity does not hold in the short term, therefore, the asset market can be quickly adjusted, and the goods market adjustment is relatively slow economy in the short term adjustment process is through asset prices, ie interest rates and exchange rates carried out. Assume that money supply increases, prices in the sticky conditions, the balance will immediately lead to substantial rise in domestic interest rates decline, while domestic interest rates lead to capital outflows, currency depreciation. As no uncovered interest rate parity condition is always true, and thus domestic interest rates will have a future currency appreciation expectations. For a given expected future appreciation of the currency depreciation rate to be determined by purchasing power parity over the long-run equilibrium value, so, in the short term, the exchange rate exceeds its long-run equilibrium value, but with falling interest rates and currency devaluation, commodity markets there will be excess demand, pushing prices higher level, thus reducing domestic money balances, so that domestic interest rates, capital inflows, currency appreciation, economic system gradually achieve long-term equilibrium level. Therefore, from the general sense, the exchange rate overshooting is for a given external disruption, the response rate in the short term than its long-run equilibrium value, then the opposite will happen adjustment process, the exchange rate eventually returned to the long-run equilibrium value . Therefore, according to overshoot theory, exchange rate volatility of the exchange rate in a dynamic adjustment process in a short-term behavior.
The third is "speculative bubble theory." According to the exchange rate determined by analysis of asset markets, even without the money supply and income levels and other changes in economic fundamentals, as long as the expected change in exchange rates will change. Once out of the basic factors and the exchange rate change is expected to self-reinforcing, the formation of speculative bubbles. Foreign exchange market is a speculative bubble on the basic factors that can not be explained by the exchange rate, speculative market bubble depends on the number of psychological factors. Is a rational speculative bubble in the bubble, if speculators are fully aware of the decision by the economic fundamentals of the market equilibrium exchange rate, even if the exchange rate is now higher than the equilibrium exchange rate, as long as the future exchange rate to compensate for the risks to speculators. Speculators purchase is rational, because he knew one day the price will return to the equilibrium level. If all of the speculators are so expected, then, in each period, there will be a probability of a bubble. Once the bubble, the exchange rate will rise faster and faster, because the exchange rate must rise faster to compensate for the risk borne by speculators. The existence of speculative bubbles, the exchange rate may be completely divorced from economic fundamentals arising from self-strengthening exercises.
The fourth is the "currency substitution theory."
Floating exchange rate currency substitution theory is that the floating exchange rate system, the economic agents for the transaction motive, motivation and prevent speculative motives, will hold foreign currency. Currency substitution arising mainly due to multinational companies in different countries of production and operation, they have strong incentives to diversify their cash balance of composition, in order to facilitate their business in different countries, to reduce transaction costs. Meanwhile, speculators profit by trading currency, they have to hold foreign currency in order to be more liquid foreign capital, it is easy to exchange with other currencies. In addition, central banks with foreign currency holdings of international reserves, used to intervene in the foreign exchange market, exchange rate and macroeconomic stability. Therefore, the floating exchange rate regime, economic agents have an incentive to hold a basket of currencies, in order to reduce exchange rate risks. Various currencies in the currency portfolio in proportion with each of the risks and benefits of a currency to changes, as countries relax foreign exchange controls, currency substitution has become a floating exchange rate system, a universal phenomenon. In the presence of substitution between money and foreign currency, thus increasing the pressure on the currency depreciation and appreciation. The higher the elasticity of currency substitution, the exchange rate more volatile, because the high elasticity of currency substitution in the case, a smaller money supply growth will lead to huge changes in the exchange rate, therefore, an alternative currency exchange rate fluctuations will increase the magnitude of the exchange rate more volatile.
Fifth is "news" theory. Exchange Rate Determination "news" theory, in the foreign exchange market, the new information can cause the expected changes, the expected change will soon be reflected in the exchange rate, therefore, new information on the exchange rate changes have a decisive role in these new Information is the "news", that is, unpredictable events. Common effects of exchange rate changes "news", including the release of economic statistics, political events, a new international monetary arrangements, rumors and so on. As the "news" events can not be expected, therefore, with the "news" linked to exchange rate movements can not be expected, the foreign exchange market depends on the information to reflect this information is not "good" or "bad", but than expected on such information is "better" or "worse", it is expected the information included in the current market exchange rates among the exchange rate is expected to not only respond to the information. For example, when the Government announced the balance of trade and other statistics of the money supply, the market exchange rate does not depend on changes in the size of the statistics themselves, but on these statistics and the difference between people's prior expectations, this "news" will affect the exchange rate changes. Exchange Rate Determination "news" theory reflects the essential characteristics of the exchange rate, exchange rate is an asset price is determined in asset markets, with volatility and unpredictability in the asset market, the current assets reflects the future events expected, the new information it can quickly respond, thus the inherent volatility of the asset price characteristics.
The six "non-rational expectations theory." That theory holds that the foreign exchange market is not all rational expectations, from the foreign exchange market transactions, the actual situation, there is ample evidence that the foreign exchange market on a variety of expectations, according to the U.S. Federal Reserve Bank of New York trading on the foreign exchange market statistics, the world's daily trading volume of foreign exchange up to $ 430 billion, the U.S. Federal Reserve Bank report also showed that only 4.9% of transactions are conducted between non-financial institutions, 4.4% of the transactions between the non-bank , that is, the proportion of importers and exporters is very low. Thus, trading on the foreign exchange market transactions between major banks and trading volume increases, indicating that there are a variety of market expectations, otherwise they would not have such a large volume, so the foreign exchange market is expected to not always rational. In the foreign exchange market, the difference is expected due to different forecasting methods.
Floating exchange rate in the foreign exchange trading, is widely used prediction method based analysis and technical analysis. The so-called fundamental analysis, is by analyzing the underlying factors of exchange rate changes the trend of exchange rate movements speculation, these basic factors, including money supply, interest rates, prices and other factors, a variety of asset markets to exchange rate determination based on the analysis of the forecast are the basis for analysis. Based analysis is based on a given exchange rate model to calculate the equilibrium value of the exchange rate, when the market exchange rate deviation from the equilibrium exchange rate, the base currency analysts expect will eventually return to equilibrium exchange rate, which is a source of exchange rate stability. Technical analysis, also known as chart analysis, is through the analysis of past exchange rate changes to infer the future trend of the exchange rate movement. Chart are often used in analysis methods include moving average, momentum analysis. A common feature of these methods is that when the market indicators (exchange rate index, trading volume or rate of change of a particular exchange rate) rose from a low to a certain percentage, traders expect the exchange rate will continue to rise, when the market index from a high point down to a certain extent, traders expect rates to continue to decline. Chart's expected to be known as the "wave effect in time", which is a source of exchange rate instability, due to technical analysis of the information is only used by past exchange rate changes, and rational expectations require the parties to use all relevant information to predict future exchange rate movements, so the technical analysis of all relevant information to predict future exchange rate movements.
