Analysis of Interest Rate Hikes and Exchange Rate Between U.S. and China

Abstract

Recently, the rates between Chinese RMB and the USD have been on the rise with the deflation of Chinese RMB. This paper looked into the relationship of interest rate hikes and exchange rates between the U.S. and China. The interest rate in the U.S. is closely related to the strength of U.S. dollar and capital flow between the two largest economies in the world, therefore, the research into the topic could help understand how the interest rate hike in the U.S. currently would affect the exchange rate between the two countries. In this paper, methods like theoretical analysis are used to understand the historical background of interest rate hikes, the deciding mechanism, and used a case study to understand the impact of U.S interest hike on CNY-USD exchange rate. The result showed that the U.S. interest rate hike would lead to a depreciation of CNY. Meanwhile, as the Chinese monetary policy focuses more on independence, the correlation becomes lower.