MacDonald and Ricci ( 2005) stated that high imports from other countries decrease the supply of foreign currencies, thus depreciating home currency. Trade openness has positive and negative impacts on the exchange rate of any country with its trading country. ( 2008) and Xiaopu ( 2002) revealed that trade openness shows the margin of trade between different countries and economies. Drine and Rault ( 2006), Hau ( 2002), Lartey et al. High interest rate boosts inflation in any country and higher inflation rate causes depreciation in a host country currency. Fisher ( 1930) revealed that nominal interest rates and inflation rate have association with each other. Kulkarni and Ishizaki ( 2002) pointed out that the high inflation rate causes a lower value of the home currency. High inflation rate minimizes the country’s export and minimalize the demand of local currency. Smith ( 1999) stated that higher inflation rates minimalize the competitiveness of the country in international market with its trading partners. Engel and Rogers ( 2001) study show that if any country has a greater price level of different commodities, the home currency of that country will be facing depreciation in exchange rates as compared to other countries. Purchasing power parity theory endeavored to find that in different countries having fluctuating exchange rates, equilibrium in exchange will happen when buyers in these countries hold similar buying power. The exchange rate of any country can be affected by its inflation rate. ( 2005) revealed that economic growth affects positively the exchange rate. One of the most important factors affecting exchange rate is the gross domestic product growth rate. Therefore, it encourages US consumers demand more Chinese products and US firms import Chinese products. When CNY is depreciated - it makes China’s products become cheaper as compared to the United States product. The consequences of China’s currency policy for the US economy are complicated. However, it was appreciated again in June 2010. China stopped CNY appreciation in July 2008 because the global economic crisis was impacting China’s exporters. Starting in 1995, CNY has been appreciating over the next 3 years since some of its major trading partners have forced the country to switch to the managed peg system. The CNY exchange rate against USD remained to be constant from August 1995 to July 2005. Morrison and Labonte ( 2013) stated that China started to peg CNY to dollar at 8.2770 CNY per USD back in 1995. Saudi Arabia, Qatar, Oman and Jordan with different Middle East countries that export oil to other countries has pegged their country currencies to USD since the US is the largest oil importing country in the world. To protect against the currency depreciation countries will choose to peg their currency for their exported goods and services. The floating exchange rate is adopted by the US, Europe, Japan for international trade and the currencies of these countries depend on how the currency trades in foreign exchange markets.Ĭountries having international trade relation with other countries should maintain the stability of their currencies. Nowadays floating and pegged exchange rates are the most popular exchange rates. The last type of exchange rate is pegged exchange rate - when home currency is pegged as compared to the currency of another country, and both countries are similar as compared to other countries’ currencies (Moffett et al., 2016 Piana 2001). Freely floating rate is the exchange rate that fully relies on the force of demand and supply at an open market, without any government interaction. Managed floating exchange rate is the rate based on the demand and supply of specific currencies under certain interaction of the government. The fixed exchange rate is controlled by the government, which is using country’s reserves for a specific time period. ( 2017) categorized exchange rate into four types. Different economists argue that a flexible exchange rate is considered to be an important factor for any economy. Exchange rate is the value of one country’s currency into another country’s currency.

Usd cny exchange rate