Understand Exchange Rates in One Breath: Why Do the US Dollar, Japanese Yen, and Chinese Yuan Rise and Fall?
When many people hear “foreign exchange,” they feel it’s far removed from their lives—something only central banks or Wall Street care about. But that’s not true.
Fluctuations in exchange rates affect export factory orders, the prices of imported goods, the cost of studying or traveling abroad, and even your livelihood.
So how do you look at exchange rates? Just remember three words: prices, interest rate differentials, and confidence.
1) First, understand the direction
For example, USD/CNY = 7 means:
1 US dollar = 7 Chinese yuan.
If that number rises from 7 to 7.3, it means 1 US dollar can buy more Chinese yuan. That’s called the US dollar appreciating and the Chinese yuan depreciating.
If it falls from 7 to 6.8, it means the US dollar is weaker and the Chinese yuan is stronger.
So when you look at an exchange rate, ask yourself first: From whose perspective?
2) In the long run, look at prices
The simpler logic is: where things are cheaper, you can buy more there.
If a country’s goods are cheap, people will flock to buy its products, which increases demand for that country’s currency. Over time, that currency is more likely to appreciate.
This is the basic logic of “purchasing power parity.”
In simple terms:
A country with low prices, strong exports, and a trade surplus tends to face more upward pressure on its currency in the long run.
A country with high prices, high import demand, and a trade deficit tends to face more downward pressure on its currency.
But these are slow-moving factors. Low prices today don’t automatically mean the exchange rate will rise tomorrow.
3) In the short run, look at interest rate differentials
Money really does like to run toward higher interest rates.
For example, if Japan’s interest rate is close to 0%, while the US rate is 5%, many funds will borrow cheap yen, convert to dollars, and then earn higher interest in the US.
This is called carry trade.
So in the short term, exchange rates often follow interest rate differentials:
Higher-interest-rate currencies are more likely to appreciate, and lower-interest-rate currencies are more likely to depreciate.
That’s also why during periods of US rate hikes, the dollar is often strong; with Japan’s long-term low rates, the yen tends to face pressure.
4) In critical moments, look at confidence
Even if interest rates are very high, it doesn’t matter if people don’t trust it. But interest rate differentials aren’t everything.
At one point, Argentina pushed its interest rate above 100%, yet the peso still collapsed. Why?
Because the market didn’t believe it.
People worried about money-printing, defaulting, and foreign exchange controls. Even with high interest, nobody dared to buy.
So the third word is the most important: confidence.
When a country’s economy is stable, the central bank is credible, debt is manageable, and politics are stable, its currency is easier to trust. Conversely, if inflation gets out of control, foreign debt is high, or policies are chaotic, the currency is easier to depreciate.
5) How do yuan’s rises and falls affect ordinary people?
When the yuan appreciates:
- Traveling abroad and studying overseas get cheaper
- Overseas shopping and buying from overseas retailers get cheaper
- Imported oil, soybeans, and raw materials become cheaper
- This helps reduce imported inflation
- But export companies face more pressure
When the yuan depreciates:
- Export companies become more competitive
- Foreign trade firms and related jobs benefit
- But imported goods become more expensive
- The cost of traveling abroad and overseas shopping increases
So there is no absolute “good” or “bad” in currency appreciation or depreciation—only different groups benefit.
Conclusion: When you look at exchange rates later, don’t panic.
Remember this framework:
In the long run, look at prices.
In the short run, look at interest rate differentials.
In times of crisis, look at confidence.
Where money flows, that currency is more likely to appreciate.
Exchange rates aren’t that mysterious. In essence, they are global capital “voting” with its money.
When many people hear “foreign exchange,” they feel it’s far removed from their lives—something only central banks or Wall Street care about. But that’s not true.
Fluctuations in exchange rates affect export factory orders, the prices of imported goods, the cost of studying or traveling abroad, and even your livelihood.
So how do you look at exchange rates? Just remember three words: prices, interest rate differentials, and confidence.
1) First, understand the direction
For example, USD/CNY = 7 means:
1 US dollar = 7 Chinese yuan.
If that number rises from 7 to 7.3, it means 1 US dollar can buy more Chinese yuan. That’s called the US dollar appreciating and the Chinese yuan depreciating.
If it falls from 7 to 6.8, it means the US dollar is weaker and the Chinese yuan is stronger.
So when you look at an exchange rate, ask yourself first: From whose perspective?
2) In the long run, look at prices
The simpler logic is: where things are cheaper, you can buy more there.
If a country’s goods are cheap, people will flock to buy its products, which increases demand for that country’s currency. Over time, that currency is more likely to appreciate.
This is the basic logic of “purchasing power parity.”
In simple terms:
A country with low prices, strong exports, and a trade surplus tends to face more upward pressure on its currency in the long run.
A country with high prices, high import demand, and a trade deficit tends to face more downward pressure on its currency.
But these are slow-moving factors. Low prices today don’t automatically mean the exchange rate will rise tomorrow.
3) In the short run, look at interest rate differentials
Money really does like to run toward higher interest rates.
For example, if Japan’s interest rate is close to 0%, while the US rate is 5%, many funds will borrow cheap yen, convert to dollars, and then earn higher interest in the US.
This is called carry trade.
So in the short term, exchange rates often follow interest rate differentials:
Higher-interest-rate currencies are more likely to appreciate, and lower-interest-rate currencies are more likely to depreciate.
That’s also why during periods of US rate hikes, the dollar is often strong; with Japan’s long-term low rates, the yen tends to face pressure.
4) In critical moments, look at confidence
Even if interest rates are very high, it doesn’t matter if people don’t trust it. But interest rate differentials aren’t everything.
At one point, Argentina pushed its interest rate above 100%, yet the peso still collapsed. Why?
Because the market didn’t believe it.
People worried about money-printing, defaulting, and foreign exchange controls. Even with high interest, nobody dared to buy.
So the third word is the most important: confidence.
When a country’s economy is stable, the central bank is credible, debt is manageable, and politics are stable, its currency is easier to trust. Conversely, if inflation gets out of control, foreign debt is high, or policies are chaotic, the currency is easier to depreciate.
5) How do yuan’s rises and falls affect ordinary people?
When the yuan appreciates:
- Traveling abroad and studying overseas get cheaper
- Overseas shopping and buying from overseas retailers get cheaper
- Imported oil, soybeans, and raw materials become cheaper
- This helps reduce imported inflation
- But export companies face more pressure
When the yuan depreciates:
- Export companies become more competitive
- Foreign trade firms and related jobs benefit
- But imported goods become more expensive
- The cost of traveling abroad and overseas shopping increases
So there is no absolute “good” or “bad” in currency appreciation or depreciation—only different groups benefit.
Conclusion: When you look at exchange rates later, don’t panic.
Remember this framework:
In the long run, look at prices.
In the short run, look at interest rate differentials.
In times of crisis, look at confidence.
Where money flows, that currency is more likely to appreciate.
Exchange rates aren’t that mysterious. In essence, they are global capital “voting” with its money.