Peg To The US Dollar Research Paper

dollar was close to an eight year shortage against the real, having lost more than 33% of its value during 2009 alone. During the past 12 month era, the exchange rate of the U.S. dollar (USD) has diverse from a low of BRL R $1.5310 to in height of BRL $1.7790. During 2010, the United States dollar typically kept an everyday exchange rate between (BRL) R$1.70 and (BRL) R$1.80, occasionally reducing below the (BRL) R$1.70 level.

The demand for Australia's currency in the foreign exchange market (Forex) is a derived demand. It is derived from the demand for a country's exports of goods and services and its assets.

As Australand has a flexible exchange rate, the first and most logical method is to reduce interest rates. This will cause an outflow of capital, and the sale of Australand dollars, as investors seek a higher interest rate elsewhere. This relation is illustrated in figure three below and shows that a decrease in interest rates causes a decrease in the exchange rate:

Achieving external stability is an important objective of economic policy, achieving this stability ensures that imbalances in Australia’s economic relationships with other economies do not hinder achieving domestic economic policy goals such as lower rate of unemployment, higher rate of growth and lower inflation. There are three main factors that effect external stability the deficit on the current account (CAD), net foreign liabilities and the Australian dollar. Australia’s experienced times when overseas investors decided that the economy’s external position was unstable, and when investors like such decide to withdraw their

There are numerous reasons for the sudden decline in value of Australian currency, one of which is the renewed strength of the US dollar, due to the American economy’s acceleration through its recovery. However, there is the additional fact that the RBA has been cutting interest rates, resulting in Australia becoming a less attractive place for investors, as well as the continual impacts of deteriorating commodity prices

Australia has a long history of large and persistent current account deficits. During the 1960s the current account deficit averaged the equivalent of 2 per cent of gross domestic product. The CAD rose considerably, due to the floating of the Australian dollar and the opening of the capital account in 1980s, and by 1990s CAD has sustained around an average of about 4.5 per cent of GDP. However, in recent years the deficit has been falling and in 2011 it was just 2.25 per cent.

Ever since the Bretton Woods agreement in 1944, the U.S dollar became the world’s currency. Bretton Woods agreement was basically an agreement on which every country currency would be back up by the dollar, due to the fact that after WWII United States was the only one with the biggest gold reserve in the world. Although it was proposed as a good idea it had its flaws for one even though it help the U.S and other countries there was simply not enough gold to continue backing up the dollar value. Which lead to President Richard Nixon to abolish the gold standard economy. His abolish of a gold standard economy lead to a new proposal on which the dollar would be back by.

The Australian economy marks external stability as an important objective because it can influence other important aims such as economic growth, unemployment and inflation. External stability is the concept of sustaining a nation’s external accounts so that in the future, it is able to service its foreign liabilities and can avoid currency volatility. When looking at external stability, we must examine Australia’s balance of payments, which records all economic transactions between Australia and the rest of the world. Australia’s balance of payments has two components, which is the current account and the capital and financial account. The current account measures the receipts and payments for trade in goods and services, transfer payments and income flows, while the capital and financial account shows international borrowing, lending, purchasing and sales of assets.

At the end of World War Two, the Bretton Woods system was established for world currencies. This system involved countries fixing their currencies to the US Dollar, which in turn was tied to the value of gold at a fixed exchange rate of $35 per ounce. As this was a fixed exchange rate system it effectively forced countries to pursue a certain monetary policy, in order to keep their currency pegged to the Dollar and in turn the value of gold.

As a result of the Vietnam war, the US did the most anticipated and foolish thing and just began printing much more money to finance the war. Coverage for “gold-for-dollar” debt was reasonable before the war. But, some countries in particular France saw in which places things were heading. Charles de Gaulle was adamant about having the French US Dollar inventory redeemed for gold, as was promised. This exchanges happened to also take place and caused the back-end of the gold coverage for the USD to downsize to around 20% from 50% far past the economic breaking point.

- In 1983, Hawke floated the Australian dollar so its value was set on the world exchange rate.

The government then had to allow the dollar to be backed by silver as well so that they could print more and keep up with the economic growth. Not doing so would cause some people to hoard money, and it would slow down the velocity of money. When this happens there is deflation, and danger of things being worth less, and money being hard to find as people hoard it.

The US dollar ($) is the official currency of the United States and its overseas territories. Just like the euro there are other currencies pegged to it, such as the Bermudian Dollar. The US dollar is the fiat currency most used in international transactions and is one of the world’s most dominant reserve currencies.

Overseas, the sterling currency was of lesser importance. Dollars were more alluring - and as many thought stable. But in 1971 President Nixon devalued the dollar - a response to damage done by the Vietnam War - and opened the gates to a new era of floating exchange. The stability of the postwar settlement was over.

At independence in 1980 the Zimbabwe dollar replaced the Rhodesian dollar at par at a rate which was higher than the American dollar. Although this quickly deteriorated, it was not until the late nineties that a series of events led to the demise of the Zimbabwean dollar. In 2008 in an 18-month ‘experiment’, foreign currency was accepted as legal tender for transactions with a set number of retailers.