Impact Of FED Interest Rate Raise On CNY Exchange Rate

As economies grow,the connections among countries get closer.Exchange rates,as the connecting tie between economies,fluctuate due to factors such as interest rate,flows of capital,investor prospects,and macroeconomics.The past three interest rate hikes by the FED have influenced the exchange rate of CNY.Because of the unique characteristics of the economic development of China,such influence might not be captured by the predictions of theoretical models.Under the years of 1994 to 2014 as its context,along with the interest rate raise in 2015 and the U.S.and Chinese economic conditions,this article compares the effects of various factors on CNY exchange rate.There were three interest rate raise cycles in the U.S.during 1994 to early 2014.Due to the restrictions on mobility on capital and the exchange rate regime of this era,CNY exchange rate is determined by many factors and therefore such interest rate raises by the FED have not significantly affected the CNY exchange rate,nor were CNY interest rate or mobility of capital significantly affected.The CNY exchange rate was more affected by the macroeconomic factors.The 2015 interest rate raise by the FED however,is different.The macroeconomic factors of nations were relatively stable.The market expects an interest rate increase by the FED.The FED also communicated effectively with the market about its economic expectations and possible operations.In terms of China,CNY was added to the basket of currencies of SDR,and CNY became more important in the world market.As the CNY exchange rate regime develops,outflow of capital resulted in big CNY exchange rate fluctuations.The prospect of the market influences the CNY exchange rate.China is experiencing structural reform,and its increase rate of economic development became a closed followed indicator.The impact of FED interest rate raise on CNY exchange rate,through the major factors of interest rate,flow of capital,prospects,and macroeconomic factors,appeared to be different than the pre-2015 FED interest rate hikes.Through comparison and analysis,along with the economic condition of China,this article suggests the following to the CNY exchange rate reform: First,China should keep improving its internal structure;Second,open up capital markets with plans;Third,marketize the CNY exchange rate and make less interventions,also establish a broad-range fluctuation tolerance system.