The Australian Exchange Rate

3220 Words Nov 10th, 2002 13 Pages
The Australian Exchange Rate
By: Dontae Smith

Introduction: What factors affect the demand and supply of Australian dollars in the foreign exchange markets? Distinguish between the possible causes and effects of currency depreciation and a currency appreciation on the Australian economy. What forces have come into play, if any, in the past four months that have affected the value of the Australian dollar?
Exchange Rate: "The rate at which one unit of domestic currency is exchanged for a given amount of foreign currency"
A BRIEF HISTORY OF THE AUSTRALIAN DOLLAR
Until 1971, the Australian dollar (AUD) was "pegged" to the British pound. This meant that the AUD rose or fell in line with the pound. In 1971, the AUD became pegged to the US
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One reason is changes in commodity prices. Another is the terms of trade. These two variations tend to have an immediate impact on the AUD. A rise in commodity prices and an improvement in the terms of trade are generally expected to improve the Current Account Deficit (CAD). This will often result in an increase in the value of the AUD because of the expectation that the CAD will improve over the short to medium term.
The level of international competition and the Australian inflation rate relative to other countries also influences the demand for Australian exports. If Australian firms are competitive in the world market and Australia's inflation rate remains low, it means that Australia's exports will be cheaper to foreigners, making them more attractive to buy.
Changes in world income levels will also influence the overseas demand for Australian exports. The demand for Australia's commodity exports in particular is highly dependent on the levels of income of Australia's trading partners. When the world economy is in a period of upturn, demand and prices for Australian exports will rise.
Also affecting world demand for Australian exports are simply the tastes and preferences of overseas consumers for Australian exports. An increase in demand for Australian dollars generally causes the value of the currency to appreciate.

SUPPLY
The supply of Australia's currency is also derived. It

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