Business Economics Australian Exchange Rate

Question: Discuss about the Business Economics for Australian Exchange Rate. Answer: 1. The data for the Australian exchange rate with respect to US dollars has been derived from deserve bank of Australia. Monthly data for three last three years on the exchange rate of Australia with regards to us dollars has been taken. The following data ha s been used to frame graph 1, below. According to graph 1, it can be seen that the exchange rate of the country has seen many ups and downs in the last three year, yet now, there is a fall in the exchange rates. This shows that the company has focussed on eliminating unemployment from the economy. Graph 1 : Australian Exchange Rate With Respect To US Dollar For The Past Three Years (Monthly) Source : As Created By Author Considering various factors in the economy, there is constant fluctuation in the exchange rates of a country. These factors could be interest rates, inflation, government debt, competitiveness, economic growth and political conditions of that country. When a country is more dependant to its own goods, there is a strong relationship between the exchange rate and the commodity prices of the goods in that country (Bahmani-Oskooee, Harvey and Hegerty 2013). Australian dollar is positively related to many goods, such as gold and various other metals. Australia is considered as one of the biggest gold producers if the world. Therefore, the dollar tends to move in accordance with the price of the gold. With the rise in the prices of gold, there is a positive effect on australian dollar, thereby imposing appreciation of the currency and raising the exchange rate. World commodity price data, as derived from international monetary fund, shows a positive movement of the curve, in the last three years (Imf.org. 2016). Australian exchange rate has shown some fluctuations in these last three years, yet, these fluctuations have been quite minor in nature. Hence, by plotting the two curves of world commodity price index and australia exchange rate from the year 2014-2016, in graph 2, it could be seen that with the raise in the world commodity price index, there has been a maintained stable exchange rate of the country. This shows that australian dollar is stable with the change in the price of goods. Graph 2 : Relation Between Australian Exchange Rate And World Commodity Price Index (Source : As Created By Author ) 2. Exchange rate of a country is calculated in terms of the countrys currency along with another currency of another country. An exchange rate consists of two component, domestic and foreign currency. In order to calculate the Australian exchange rate , US dollar is considered as the base currency and Australian dollar is considered as the counter currency. Exchange rates can be both floating or fixed. In floating exchange rates currency rates are determined by market forces, whereas, in fixed exchange rate , the domestic currency is fixed to the widely accepted currency. The Australian exchange rate is a bilateral rate against the US dollar (AUD/USD). Trading the Australian dollars in the foreign exchange market is predominantly against the us dollar. The us dollar is the main international medium of exchange. According to the current exchange rate of Australian dollar with respect to us dollar, is 76 us cents. From the past records, it can be seen that the exchange rate of Australia has been fallen to a considerable rate. This is a good sign for the economy. It shows that the Australian dollar is adjusting to significant fall in the key commodity prices, in order to control their exchange rate with respect to us cents. The government of Australia is implementing many strategies, in order to curb down the rates with respect to us cents, as it would stabilise the economy. A further fall in the exchange rate of the Australian currency is expected by the end of the year 2016. A fall in the exchange rate is considered as a depreciation situation. This prophesizes that the exports of the country would be cheaper, and the imports would be costlier. Hence, there would be an increased in the exports of the company, and a reduction in the imports, thereby affecting the trade balance positively. This would increase the aggregate demand curve and thereby, lead to a greater economic growth. This would ensure the growth of the economy and maintain sustainability of the country. 3. In order to raise the exchange rate from 65 us cents to 70 us cents, Australia has to implement many steps , that would help in raising the exchange rate. The factors that influence the exchange rate of a country are many (Diebold 2012). By analysing those factors and introducing structural variations in such cases, Australia would be able in raising the exchange rate : A raise in the interest rates, within the country, would be beneficial for others to deposit money in Australia. This thereby, creates appreciation of the currency , thereby, raising the exchange rate. With the speculation of the rise in Australian dollar, people would demand more in the current state, in order to make more profit. This raise in the demand would raise the value, thereby raising the exchange rate from 65 us cents to 70 us cents. By raising the standards and quality of Australian goods, the goods would become more attractive and competitive in nature. With the raise in the demand for Australian goods, the appreciation in the Australian currency would raise the exchange rate (Tang and Xiong 2012). By raising the value of the government debt in Australia, the exchange of the country can be influenced positively. by implementing these above mentioned methods, the exchange rate of Australia can be raised. The raise in the exchange rate of the country is accustomed with both advantages and disadvantages for the economy. With a raise in the exchange rate, there would be a downward pressure exerted on inflation. This would result in more imports to be attracted towards the country. A high value f the currency would results in imposing the domestic producers to raise their efficiency. Along with the advantages, various disadvantages are also assisted to the raise in the exchange rate. The first drawback is that there would be a damage in the export industry of the country. There would be a fall in the exports done by the country, thereby creating a negative impact on the domestic producers of Australia. This would decrease the aggregate demand curve and slow down the economic growth of the country. There are high chances of unemployment in the economy. Its is a good method to fight against the inflation prevailing in the economy, but its might worsen the employment conditions of Australia. Reference Diebold, F.X., 2012.Empirical modeling of exchange rate dynamics(Vol. 303). Springer Science Business Media. Tang, K. and Xiong, W., 2012. Index investment and the financialization of commodities.Financial Analysts Journal,68(5), pp.54-74. Bahmani-Oskooee, M., Harvey, H. and Hegerty, S.W., 2013. The effects of exchange-rate volatility on commodity trade between the US and Brazil.The North American Journal of Economics and Finance,25, pp.70-93. Imf.org. (2016). IMF Primary Commodity Prices. [online] Available at: https://www.imf.org/external/np/res/commod/index.aspx [Accessed 13 Oct. 2016]. Anon, (2016). [online] Available at: https://www.rba.gov.au/statistics/historical-data.html#exchange-rates [Accessed 13 Oct. 2016].