| With the development of globalization, the relationships between countries become closer and closer. Exchange rate which is the bridge of trade and finance between two countries plays a dramatic role of international finance. Recently, the exchange rate between America and China ascended gently from 1990 to 1993. While it soared sharply in 1994, and then the figures represented a general decline in the late 20 years. Meanwhile, The system of exchange rate was reformed several times from 1980 to 2014. It is said that China had been looking for a suitable system. However, which system is the best one for China? If we intend to resolve this problem, we have to find factors which can affect exchange rate. By using yearly data for the 1994-2013 period and a Factor Analysis Method, this paper evaluates the determinants of exchange rates between America and China. By considering the fact, this paper uses 13 independent variables reflecting development of China and America, foreign exchange reserve, openness, trade, FDI, Gross domestic savings, money supply, Gross fixed capital formation, price and interest differential respectively. We employed a linear stepwise regression method to analyze the 4 factors which were attained from the Factor Analysis. The results suggest that, firstly, the 4 factors(f1、f2、f3、f4) represent comprehensive situation of development in China, the speed of economic growth and FDI in China, interest differential between China and America, the development of America respectively. Secondly, f1, f2, f3 are selected but f4 is rejected. We can see from the regression model that exchange rate(Y) has negative correlation with f1 and f3, while has positive correlation with f2. Thirdly, the exchange rate and interest differential appear in a negative correlation, which agrees with Interest Parity theory. Fourthly, exchange rate has something to do with foreign capital inflow. The independent X5 which is FDI/GDP and has the major factor loadings in factor 2 affect the foreign capital inflow in a sense. Similarly, X3 and X4 which play significant roles on factor 1 have a certain influence on the foreign capital inflow. Fifthly, although it is difficult to describe the exact relationship between GDP, CPI, gross foreign reserve, gross fixed capital formation, openness and exchange rate, f1 representing comprehensive development of China has positive correlation with exchange rate. Lastly, exchange rate relates to policy and shock of American economy. The financial crisis erupted in 2008, the people’s bank of China adjust the policy of exchange rate in 2005 and 2010. However, the exchange rate, some factors and independents expressed obvious fluctuation. Thus the change of policy and the shock of financial crisis can make a difference to exchange rate. Finally, this paper comes up with some suggestions. China should promote the reform of interest rate system, build the good relationship between exchange and interest rate. Using financial tool to protect economy from exchange rate risk. To make the foreign reserve more suitable. Lastly, dealing with the relationship between the increase of development and the change of exchange rate. |
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