Outline the causes of a decrease in demand for the Australian dollar, and discuss the impacts on the Australian economy of a sustained depreciation of the Australian currency.
Essay Four (Exchange Rates): Topic 2 – Australia in the global Economy
Outline the causes of a decrease in demand for the Australian dollar, and discuss the impacts on the Australian economy of a sustained depreciation of the Australian currency.
The exchange rate is a measure of the value of a currency relative to another and is influenced by the demand and supply of the Australian Dollar (AUD). Changes in any of the factors that affect supply and demand causes the AUD to rise or fall. The demand for the AUD is derived from the demand of Australia’s goods, services and assets, which is impacted by domestic and international economic conditions. Therefore, factors such as decreased capital inflow from investors, decreased demand for Australian exports and speculation that the AUD will fall are the predominant causes of the decrease in demand of the Australian dollar. This decrease in demand has resulted in a sustained depreciation of the Australian currency that has resulted in various positive and negative implications for the Australian economy.
Capital inflow impact the exchange rate as foreign investors wanting to invest in Australia must exchange their own currency for Australian dollars therefore impacting the demand for Australian currency. The level of Australian interest rates relative to overseas interest rates may influence their investment decisions. Recently the interest rate has fallen from 3.75% in May 2013 to 2.25% in April 2015, causing a decrease in the amount of foreign investment, as investors are not gaining as much return on their investment. Instead investors look at investing in other stable countries such as China or New Zealand with an interest rate of 6% and 2.5% respectively due to possibility of higher returns, therefore decreasing the demand for the AUD.
Additionally, expectation of lower levels of domestic economic growth will influence the size of the capital inflow and decrease the demand for Australian dollars, causing currency
Outline the causes of a decrease in demand for the Australian dollar, and discuss the impacts on the Australian economy of a sustained depreciation of the Australian currency.
The exchange rate is a measure of the value of a currency relative to another and is influenced by the demand and supply of the Australian Dollar (AUD). Changes in any of the factors that affect supply and demand causes the AUD to rise or fall. The demand for the AUD is derived from the demand of Australia’s goods, services and assets, which is impacted by domestic and international economic conditions. Therefore, factors such as decreased capital inflow from investors, decreased demand for Australian exports and speculation that the AUD will fall are the predominant causes of the decrease in demand of the Australian dollar. This decrease in demand has resulted in a sustained depreciation of the Australian currency that has resulted in various positive and negative implications for the Australian economy.
Capital inflow impact the exchange rate as foreign investors wanting to invest in Australia must exchange their own currency for Australian dollars therefore impacting the demand for Australian currency. The level of Australian interest rates relative to overseas interest rates may influence their investment decisions. Recently the interest rate has fallen from 3.75% in May 2013 to 2.25% in April 2015, causing a decrease in the amount of foreign investment, as investors are not gaining as much return on their investment. Instead investors look at investing in other stable countries such as China or New Zealand with an interest rate of 6% and 2.5% respectively due to possibility of higher returns, therefore decreasing the demand for the AUD.
Additionally, expectation of lower levels of domestic economic growth will influence the size of the capital inflow and decrease the demand for Australian dollars, causing currency