How Are Exchange Rates Affecting Australia's Economy?
Exchange rates are the value of one currency with respect to another, for the purpose of conversion. They affect investment levels, via the cash rate and values of domestic assets; trades, via prices and the terms of trade (TOT); liabilities, via currency appreciation or depreciation and the valuation effect, and trades. Exchange rates are influenced by government policies in the short term and market forces in the long term. Since the Australian dollar (AUD) was floated in 1983 it has experienced an appreciating trend; however, in recent years the AUD has depreciated from its mining-boom highs due to expansionary monetary policy and weaker economic outlooks.
Prior to the 1980s, Australia’s exchange rate system was under a fixed system, whereby …show more content…
Foreign investors must hold AUD to invest in Australia, thus high foreign investment levels results in high demand for AUD which appreciates the currency. Secondly, if people predict that the AUD will appreciate, then the demand for AUD increases and appreciates the currency; whereas the expectation that the AUD will depreciate will induce people to sell the currency, increasing supply of AUD and depreciating the currency. Moreover, demand for AUD will increase, appreciating the currency, when demand for exports increases and supply of AUD increases when the domestic demand for imports increases, depreciating the …show more content…
This improves the CAD and BOGS. As demand increases, the AUD appreciates, causing inflation in the domestic market. Hence, the RBA increases the cash rate to make exports more expensive, leading to a fall in demand and a fall in exports. Effectively, the CAD increases. In contrary, imports initially decrease because they are more expensive hence decreasing demand. However, the lack of imports in Australia will decrease competition in the market. Consumers then seek offshore for cheaper alternatives and businesses must seek offshore for capital, thus imports increase, damaging the CAD and
Prior to the 1980s, Australia’s exchange rate system was under a fixed system, whereby …show more content…
Foreign investors must hold AUD to invest in Australia, thus high foreign investment levels results in high demand for AUD which appreciates the currency. Secondly, if people predict that the AUD will appreciate, then the demand for AUD increases and appreciates the currency; whereas the expectation that the AUD will depreciate will induce people to sell the currency, increasing supply of AUD and depreciating the currency. Moreover, demand for AUD will increase, appreciating the currency, when demand for exports increases and supply of AUD increases when the domestic demand for imports increases, depreciating the …show more content…
This improves the CAD and BOGS. As demand increases, the AUD appreciates, causing inflation in the domestic market. Hence, the RBA increases the cash rate to make exports more expensive, leading to a fall in demand and a fall in exports. Effectively, the CAD increases. In contrary, imports initially decrease because they are more expensive hence decreasing demand. However, the lack of imports in Australia will decrease competition in the market. Consumers then seek offshore for cheaper alternatives and businesses must seek offshore for capital, thus imports increase, damaging the CAD and