The Australian Dollar: The Global Financial Crisis
Executive Summary
As we know the Australian dollar was floated in 1983. And after that, it becomes the most of impact currency in the world. Within current year, the Australian dollar hit a highly record, especially the period of Global Financial Crisis.
In this report, it will take United State dollar (USD), Japanese Yen (JPY), Chinese’s Renmingbi (CNY), Euro dollar (EUR) and the New Zealand dollar NZD as examples, which are the major countries’ currencies to influence Australia dollar.
Also, it will illustrate Current global financial systems which is the greatest lesson in the GFC is that high leverage lead to asset bubbles is very dangerous, once the bubble burst, it will affect the real economy and employment. In addition, Australian …show more content…
should support some alternative measures, such as Tobin Tax, lower Australian dollar and control inflation, to management negative effect of exchange rate in Global Financial Crisis. But, some limitations of those measures should be noted.
In this report, it will be show that the change of exchange rate with Australian dollar, the special drawing (SDR) and the trade weighted index (TWI) between 2007 and 2012. In addition, it will also analysis and evaluate the exchange system within this situation.
CONTENT
Executive Summary 3
Part 1. The current change of the Australian dollar between 2007 and 2012 4
AUD/USD 4
AUD/CNY 7
AUD/JPN 8
AUD/EUR 10
AUD/NZD 11
Part 2 the function of the global financial system during financial crises 13
2.1 Current global financial system 13
2.2 Possibilities of financial crises 14
2.3 Advantage of alternative measures 15
2.4 Disadvantage of alternative measures 16
Part 3. Analyse the special drawing (SDR) and trade weighted index (TWI) 18
Reference List 21
Part 1. The current change of the Australian dollar between 2007 and 2012
It takes United State dollar (USD), Japanese Yen (JPY), Chinese’s Renmingbi (CNY), Euro dollar (EUR) and the New Zealand dollar NZD as examples, which are the major countries’ currencies to influence Australia dollar. It will be used to analysis the fluctuation of AUD in the current 5 years period.
AUD/USD Firstly, United State Dollar as the base currency in the foreign currency exchange, it is very representative. As the middle currency using for trading, USD will affect all other currencies when floated, and the supply and demand of AUD will also effect on the AUD/USD exchange rate directly. The above graph shows the float of AUD/USD in the past 5 years. It reflects a slow and stable increasing since the beginning of 2007 due to the Iron ore price raising, and reach the first peak in June 2008 at 0.97, then fall down rapidly reach the bottom of the 5 years around 0.6 in October 2008 due to the global financial crisis and the global market demand decreasing. After stay at the bottom of 5 years, it turns back and kept rising because the metal demand still stay high and the high interest rate of Australia (as graph shows below) made AUD a hedge. In OCT 2009, it stopped and stayed stable for half a year around 0.9. In May 2010 the exchange rate fall back to 0.83 in a very short term due to the Greek debt crisis and the Europe market tighten, then increasing again, first time reach 1.0 in October 2010 since the Australia dollar become floated in 1983, because of the Greek debt crisis, AUD play a hedge for another time, just like it happened in 2008-2009. After this point, AUD float at a high point around 1.0 and in the middle of 2011 even reached 1.10. Greek debt crisis never gone, iron ore price and demand keep rising, and the high interest rate of AUD made AUD stay at the highest point in the history. (Index Mundi, 2012) (Trade economics, 2012) AUD/CNY AUD/CNY had a similar fluctuation as the AUD/USD, but before early 2008 and after late 2009, it did not raise as fast as AUD/USD. That was affected by CNY appreciation cycles in 2007-2008 and 2010-2012 against the USD (as the graph show below), which offset the rising of AUD. USD is the middle currency when trading between China and Australia. Furthermore, CNY is not freely floated, it float relative to the USD and controlled by the Chinese government. So the demand and supply would not affect the AUD/CNY directly, even China become the biggest iron ore market of Australia. (Chen, 2011)
AUD/JPN
The graph above shows the float of AUD/JPY. AUD/JPY was also very similar to AUD/USD. The difference is after 2009, AUD/JPY did not recover as much as AUD/JPY. Japan was the biggest export market of Australia before 2010 China took its place. After the global financial crisis, Japanese yen also become a welcomed safe-haven currency. JPY/USD increasing very stable in the past 5 years as the graph shows below. The 2008 financial crisis affected JPN slightly because the interest rate in Japan was nearly 0 (as graph below), much lower than Australia, America and Euro zone’s interest rate. The Japanese capital was invested a lot in the foreign market before the crisis. After the crisis, this money flowed back to Japan raise the demand of JPY, made the JPY exchange rate still increasing during the crisis. (JPY/USD yahoo) (Trading Economics, 2012)
AUD/EUR This graph shows the float of AUD/EUR in the past 5 years, which display a similar trend like AUD/USD, but the fluctuation is smaller and smoother. That is because EUR/USD had a similar movement like AUD/USD during this time. Rising before 2008, falling in financial crisis, recover in 2009, and decreasing in Greek debt crisis 2010, then floating in 2011. EUR decrease sharply in the Greek debt crisis 2010, but appears at AUD/EUR, there was not much float in that time. It was caused the faith of USD comes back after America recovery from the 2008 financial crisis. The demands of EUR move to the demand of USD mainly. It caused the USD raising during the middle of 2010. (EUR/USD, yahoo)
AUD/NZD Comparing with other currency, AUD/NZD appears very special. In the last 5 years, it floated a little and stable around 1.2. The global financial crisis and Greek debt crisis did not make any significant impact. Which also means NZD/USD and AUD/USD had a very similar and close movement (as the graph below NZD/USD). However, AUD/NZD also appears a slightly increasing during the 5 years. Due to the demand of metal ore, AUD had higher demand than NZD. Because the similarity between Australia and New Zealand’s products and location, New Zealand’s economic ties with Australia very strong, also does the currency. (NZD/USD, yahoo)
As the analysis of the five currencies above, the main reason floats the Australia Dollar currency is the price of export products as iron ore, the global financial crisis, and Australia interest rate. Part 2 the function of the global financial system during financial crises
2.1 Current global financial system
Global financial system is a series of institutional arrangements related to the international monetary financial relationship, the global financial activities, including the aspects of the international monetary system, international financial institutions system and international financial regulatory system.
The U.S. financial crisis triggered by the global financial crisis has fully exposed the flaws and shortcomings of the existing global financial system, deep-seated reasons for these problems is the cultural distortions, the crisis also shows that the cultural reconstruction in reforming the international financial system, building a new international financial order process are very important (Dick, …show more content…
2009)
The global financial crisis is a direct reflection of the lack of supervision of financial market. The main flaws and shortcoming of current global financial system is:
(1) Global financial system is not suitable for the development of globalization of economic;
(2) Global financial regulatory system is weak to lead the existing global financial system’s expansion which is disorder and excessive;
(3) Decision making mechanism of global financial institution is bias or biased.
Crisis mitigation relief mechanism is narrower, which has exacerbated the risk factors of the international financial, greatly reduces its proper function, and even helps the outbreak of international financial crisis (Delargy and Charles, 1999).
The financial crisis has fully exposed the current international financial regulatory system has a large number of defects. Therefore, the almost complete deregulation of international system in the western world must be reversed.
Firstly, there is a lack of effective regulation of financial markets. The major western developed countries are lack of effective regulation of financial markets, resulting in excessive financial innovation, far beyond the physical needs of economic development. It is one of the important reason trigger the financial crisis. Secondly, global financial regulation is lack of coordination mechanisms. National financial regulatory authorities lack the necessary communication and coordination in global financial regulation. Thus, it cannot be able to control and block the spread of financial risks on a global
scale.
Finally, the IMF and other international financial institutions did not adequately fulfil its supervisory responsibilities on the global financial markets due to risk accumulation resulting in the international financial system, and eventually led to financial crisis (Bordo, Erceg and Stuckler, 2010, p.642–665).
2.2 Possibilities of financial crises
Exchange rate system is an important part of the international monetary system. Exchange rate arrangements can be roughly divided into three categories, which are the floating exchange rate system, the intermediates exchange rate system and the fixed exchange rate system. Fixed exchange rate system is easy get attacks from international speculative capital. This is because the fixed exchange rate is not entirely credible. Speculative attacks may lead to a currency crisis, forcing a country to abandon the fixed exchange rate regime. The devaluation caused by the high cost of debt of banks and enterprises hold large amounts of unhedged foreign debt, plus the central bank in order to defend the currency exchange rate and enhance the bank profit margins decline in local currency interest rates and corporate cost of domestic debt increased, giving rise to financial and economic crisis (Nicolo et al., 2010).
Floating exchange rate system does not mean the insulation with the crisis. Floating exchange rate regime countries may also suffer from the double whammy of financial and economic crisis. For example, in the United States, the U.S. under the pressure of a huge deficit to maintain a strong dollar, the reason is long-term steady stream of foreign capital inflows. The capital account surplus is largely caused by people's subjective expectations and confidence in the dollar. Once the U.S. economic slowdown and the U.S. stock market bubble economy burst changed the way people expected the U.S. economy and U.S. dollar, the flight of foreign capital will cause the dollar into the huge devaluation pressures. In order to mitigate the impact of capital flight, the Fed is likely to raise interest rates. Interest rate rise will further deepen the economic downturn. Therefore, led to a series of bankruptcy of the enterprise and the financial crisis occurred (Calvo and Reinhart, 2000).
2.3 Advantage of alternative measures
First of all, utilizing Tobin Tax is an efficient and effective way to handle speculation which helps Australian management exchange rate of global financial crisis (GFC) (Garside, n.d.). Tobin Tax, which is known as financial transaction tax, mainly aims to reduce purely speculative transactions through stabilizing exchange rate. "Tobin tax" assists to decrease financial crises from following three conditions: it will assist government to reduce the vulnerability and volatility of the exchange rate; also weaken the financial markets’ influence on the national policy in order to safeguard the government own budgetary and monetary policies; it becomes important resources to get revenue for support global environmental and social projects (Garside, n.d.). Thus, it eases the international capital flows, especially, exchange rate instability which is caused by the rapid expansion of short-term speculative capital flows.
Australian government attempts to utilize speculators’ activities to reduce fluctuation of exports and imports’ price during GFC. There are about 68% employments in actual or potential export and import competing industries (Nevile et al, 2012). During 2008 and 2009, Australian government clear promised that attach primary importance to make preservation of jobs. The Reserve Bank of Australia (RBA) applied fiscal expansion and monetary loosening to produce a low and stable interest rate environment and lead to depreciation of Australian dollar. Speculators believed that Australia dollar would be fall and gave up the activities in Australia due to financial crisis and Australian decrease in interest rate (Nevile et al, 2012). When domestic interest rate was fall, domestic investors preferred to transfer money to foreign countries to get more return. Then, the real exchange rate decreased due to increase in international supply of money, and eventually the increase in net exports (SparkNotes Editors, n.d.). Thus, negative movement of employment level and grow in GDP is decline.
Controlling inflation normally is also considered to priority policy target which results in recovering employment rate and grows in output during GFC. Increasingly more Australian worried about that the growing in mining sector will decrease employment duo to Gregory effect (Nevile et al, 2012). Harcour (2004) indicates that “The Gregory effect refers to a situation where a strong demand for resources causes an appreciation in the exchange rate.” Umaru and Zubairu (2012) said that the relationship between unemployment rate and inflation is negative in the short term in “Philips curve”. Thus, if unemployment rate is low and inflation rate is high, the tightening fiscal and monetary policy increase unemployment rates to low inflation. Otherwise, if unemployment rate is high and inflation rate is low, the expansionary fiscal and monetary policy increases inflation to low unemployment rate. The inflation and the unemployment rate can be a socially acceptable level.
2.4 Disadvantage of alternative measures
Although Australia needs Tobin tax, the implementation is fraught with difficulty. Garside (n.d.) thinks that the pros effects of Tobin Tax are overestimated in the theory. Firstly, Tobin Tax is only a form of administrative intervention on financial markets, and large amounts of capital are left for redistribution. Moreover, Tobin's idea never reaches expected condition due to lack of political consensus. Only feasible way of Tobin Tax is accepted by entire world, but the US will be still an opposition in the expected future.
The government cannot completely control speculators’ opinion, and speculators’ activities are irregular due to GFC. The exchange rate is increase and the Australian dollar has appreciated in 2009, but other developed countries, such as European, exchange rate is decrease, which leads to a large number of speculators to invest money into Australia. Australian exporters are harder competing in global market, and stimulate the de-industrialization of the Australian economy. Thus, unemployment rate is rise, for example, Toyota fired 10% of its Australian workers (Denning, 2012).
Controlling inflation and interest rate juts can reduce global financial crisis in the short run. The correlative relationship between inflation and unemployment is only existed when the economy approached full employment and full capacity. In the long term, people have sufficient time to adjust inflation expectations, Phillips curve shows that the relationship of unemployment rate and the inflation rate can be ignored (Phelps, 1967). Moreover, unemployment only can be reduced at low levels by inflation, and then the other policies, for instance incomes policies, may assist to further relieve this situation. As well as, if the unemployment rate is quite high, the relationship between unemployment and inflation is pretty weak (Nevile et al, 2012). Part 3. Analyse the special drawing (SDR) and trade weighted index (TWI)
Special Drawing Rights (SDR), also known as the ‘Paper Gold’, which is an international reserve asset. (International Monetary Fund, 2011) It is freely usable currencies to give their members countries. (International Monetary Fund, 2011) It was maintained by the International Monetary Fund (IMF) (Special Draw Rights, 2011). When the members had a weakly external potion, the IMF can appoint other members who had a strong external position to purchase SDRs. (International Monetary Fund, 2011) On the other hand; two IMF members can be voluntary exchange between each other. (International Monetary Fund, 2011) According to International Monetary Fund (2011), it was only used four countries’ currencies to exchange which is euro, Japanese yen, pound sterling, and U.S dollar, as a basket of currencies.
Trade Weighted Index (TWI), also called the effective rate, which is a weighted average rate of a country’s currency. It is an indicator that influences this country’s export and import trade by its trading partners. (OANDA, 2012) The Australian TWI was created by RBA in 1974, and is a useful standard to monitor and exhibit competitive trends with some trading partners. (Reserve Bank Bulletin, 2008)
From this line graph, it shows that the value of special drawing rights (SDR) and trade weighted index (TWI) fluctuates over these 5 years, from 2007 to 2012.
More specifically, at first in January, 2007 the value of SDR and TWI stand at only 0.5175 and 63.8. Between February 0f 2007 and the end of 2008, the number of both value fluctuated with an overall downward trend. The value of SDR plummeted, till bottoming out at 0.4399 in November, 2008. Similarly, after 2 month, the TWI also had the lowest point at 53.2. It is interesting notes that there was a very sharp increase over 3 years period to a peak of 0.6874, and 77.9, respectively SDR, TWI.
SDR
As can be known, there was a global financial crisis was happen in end of 2008, which led to the SDR had a bottom. In the wake of the GFC, the IMF was growths up their interest rate of SDR (Jeff Chelsky, 2011) In addition, the G20 leaders called for an allocation of SDGs in response to the global financial and economic crisis.’ (ActionAid USA, 2010) Within less than 5 months, the members’ countries got SDRs, which worth of about U.S. $250 billion. (ActionAid USA, 2010) It aimed to create a financial system that is free currencies exchange, which keep the balances foreign exchange market, during GFC. (John Williamsion 2009) As a result, it improved the value of SDR after 3 years period. This is reason that the SDR had a huge fluctuated from 2007 to 2012. However, Based on the fluctuation of AUD, it is easy to find that had a similar situation within those years. Because Australia also is the member of IMF, which is means that though buy or sell SDR to improve or change its value of AUD in the exchange market.
TWI
Within the GFC, the trading of import and export also effect, which dropped the lowest level. In Australia, the Austalian Dollar was depreciation between 2007 and 2008.(J.W. Nevile, 2012) During the impact of GFC, the AUD reached at US 0.9626. (Ken Edge 2011) Additionally, the USD also appeared depreciated; it is the reason that pushed the AUD up. (Ken Edge 2011) Therefore, it led to a bottomed at Australia commodity, which grew the prices for its exports, like raw material. (Ken Edge 2011)
For TWI, there is a case of TWI of Australia Dollar with RMB. Like we said, in this index, the RMB was the highest point in this index. However, the Japanese Yen is secondly rank. Reference List
Action Aid USA 2010, what are special drawing rights and how can they be used to finance climate adaptation and mitigation, retrieved 28 April 2012, .
Bordo, M, Meissner, C & Stuckler, D 2010, ‘Foreign currency debt, financial crises and economic growth: a long run view’, International Money and Finance, Vol. 29, no. 4, pp.642–665.
Calvo, GA & Reinhart, CM 2000, when Capital inflows come to a Sudden Stop: Consequences and Policy Options, University of Maryland, retrieved 1 May 2012, .
Chelsky, F 2011, Economic Premise, retrieved 23 April 2012, .
Chen, MY & Wen, Y 2011, ‘RMB Appreciation and U.S. Inflation Risk’, Economic Synopses 2011 Number 17, retrieved 22 Apr 2012,
< http://research.stlouisfed.org/publications/es/article/8832>.
Delargy, JR and Goodhart, C 1999, Financial Crises: plus ca Change (1999). LSE Financial market Group Special Paper No.108, retrieved 1 May 2012,
< http://www2.lse.ac.uk/fmg/documents/specialPapers/1990s/sp108.pdf>.
Denning, D 2012, ‘Why the Australian Dollar Isn’t Safe and the RBA Will Act Soon’, retrieved 18 April 2012, .
Dick, KN 2009, the global financial crisis: analysis and policy implications, retrieved 1 May 2012, < http://www.fas.org/sgp/crs/misc/RL34742.pdf>.
Edge, K 2011. ‘Exchange Rate’, retrieved 23 April 2012, .
Garside, B n.d., ‘Could the 'Robin Hood' Tax Really Give to the Poor’, retrieved 21 April 2012,
.
Harcourt, T 2004, ‘Why exporters hate paying top dollar’, retrieved 25 April 2012, .
Index mundi 2012, ‘Iron Ore Monthly Price-US Dollars per metric Ton’, Index mundi, retrieved 22 Apr 2012, .
International Monetary Fund 2012, ‘Special Drawing Rights (SDRs)’, retrieved 28 April 2012, .
Nicolo, GD, Ariccia DG, Laevan, L & Valencia, F 2010, ‘Monetary policy and bank risk taking’, IMF Staff Position vol.10, no. 9, retrieved 1 May 2012,
< http://www.imf.org/external/pubs/ft/spn/2010/spn1009.pdf>.
OANDA 2012, ‘Australian Trade Weighted Index’, retrieved 28 April 2012, .
Phelps, ES 1967, ‘Phillips Curves, Expectations of Inflation and Optimal Unemployment over Time’, Economica, Vol. 34, no.135, pp.54-281.
Reserve Bank Bulletin 2008, an augmented trade-weighted index of the Australian dollar, retrieved 28 April 2012, .
SparkNotes Editors n.d., ‘SparkNote on Aggregate Demand’, retrieved 19 April 2012,< http://www.sparknotes.com/economics/macro/aggregatedemand/>.
Trading Economics 2012, ‘Japan Interest Rate, Trading Economic’, retrieved 21 Apr 2012,
.
Umaru, A, & Zubairu, AA 2012, ‘An Empirical Analysis of the Relationship between Unemployment and Inflation in Nigeria from 1977-2009’, Economics and Finance Review, Vol. 1, no.12, pp.42-61.
Williamsion, J 2009, Understanding special drawing rights (SDRs), retrieved 28 April 2012, .
Yahoo finance 2012, ‘EUR/USD’, retrieved 22 Apr 2012,
.
Yahoo finance 2012, ‘JPY/USD’, retrieved 22 Apr 2012,
.
Yahoo finance 2012, ‘NZD/USD’, retrieved 22 Apr 2012,
.
As we know the Australian dollar was floated in 1983. And after that, it becomes the most of impact currency in the world. Within current year, the Australian dollar hit a highly record, especially the period of Global Financial Crisis.
In this report, it will take United State dollar (USD), Japanese Yen (JPY), Chinese’s Renmingbi (CNY), Euro dollar (EUR) and the New Zealand dollar NZD as examples, which are the major countries’ currencies to influence Australia dollar.
Also, it will illustrate Current global financial systems which is the greatest lesson in the GFC is that high leverage lead to asset bubbles is very dangerous, once the bubble burst, it will affect the real economy and employment. In addition, Australian …show more content…
should support some alternative measures, such as Tobin Tax, lower Australian dollar and control inflation, to management negative effect of exchange rate in Global Financial Crisis. But, some limitations of those measures should be noted.
In this report, it will be show that the change of exchange rate with Australian dollar, the special drawing (SDR) and the trade weighted index (TWI) between 2007 and 2012. In addition, it will also analysis and evaluate the exchange system within this situation.
CONTENT
Executive Summary 3
Part 1. The current change of the Australian dollar between 2007 and 2012 4
AUD/USD 4
AUD/CNY 7
AUD/JPN 8
AUD/EUR 10
AUD/NZD 11
Part 2 the function of the global financial system during financial crises 13
2.1 Current global financial system 13
2.2 Possibilities of financial crises 14
2.3 Advantage of alternative measures 15
2.4 Disadvantage of alternative measures 16
Part 3. Analyse the special drawing (SDR) and trade weighted index (TWI) 18
Reference List 21
Part 1. The current change of the Australian dollar between 2007 and 2012
It takes United State dollar (USD), Japanese Yen (JPY), Chinese’s Renmingbi (CNY), Euro dollar (EUR) and the New Zealand dollar NZD as examples, which are the major countries’ currencies to influence Australia dollar. It will be used to analysis the fluctuation of AUD in the current 5 years period.
AUD/USD Firstly, United State Dollar as the base currency in the foreign currency exchange, it is very representative. As the middle currency using for trading, USD will affect all other currencies when floated, and the supply and demand of AUD will also effect on the AUD/USD exchange rate directly. The above graph shows the float of AUD/USD in the past 5 years. It reflects a slow and stable increasing since the beginning of 2007 due to the Iron ore price raising, and reach the first peak in June 2008 at 0.97, then fall down rapidly reach the bottom of the 5 years around 0.6 in October 2008 due to the global financial crisis and the global market demand decreasing. After stay at the bottom of 5 years, it turns back and kept rising because the metal demand still stay high and the high interest rate of Australia (as graph shows below) made AUD a hedge. In OCT 2009, it stopped and stayed stable for half a year around 0.9. In May 2010 the exchange rate fall back to 0.83 in a very short term due to the Greek debt crisis and the Europe market tighten, then increasing again, first time reach 1.0 in October 2010 since the Australia dollar become floated in 1983, because of the Greek debt crisis, AUD play a hedge for another time, just like it happened in 2008-2009. After this point, AUD float at a high point around 1.0 and in the middle of 2011 even reached 1.10. Greek debt crisis never gone, iron ore price and demand keep rising, and the high interest rate of AUD made AUD stay at the highest point in the history. (Index Mundi, 2012) (Trade economics, 2012) AUD/CNY AUD/CNY had a similar fluctuation as the AUD/USD, but before early 2008 and after late 2009, it did not raise as fast as AUD/USD. That was affected by CNY appreciation cycles in 2007-2008 and 2010-2012 against the USD (as the graph show below), which offset the rising of AUD. USD is the middle currency when trading between China and Australia. Furthermore, CNY is not freely floated, it float relative to the USD and controlled by the Chinese government. So the demand and supply would not affect the AUD/CNY directly, even China become the biggest iron ore market of Australia. (Chen, 2011)
AUD/JPN
The graph above shows the float of AUD/JPY. AUD/JPY was also very similar to AUD/USD. The difference is after 2009, AUD/JPY did not recover as much as AUD/JPY. Japan was the biggest export market of Australia before 2010 China took its place. After the global financial crisis, Japanese yen also become a welcomed safe-haven currency. JPY/USD increasing very stable in the past 5 years as the graph shows below. The 2008 financial crisis affected JPN slightly because the interest rate in Japan was nearly 0 (as graph below), much lower than Australia, America and Euro zone’s interest rate. The Japanese capital was invested a lot in the foreign market before the crisis. After the crisis, this money flowed back to Japan raise the demand of JPY, made the JPY exchange rate still increasing during the crisis. (JPY/USD yahoo) (Trading Economics, 2012)
AUD/EUR This graph shows the float of AUD/EUR in the past 5 years, which display a similar trend like AUD/USD, but the fluctuation is smaller and smoother. That is because EUR/USD had a similar movement like AUD/USD during this time. Rising before 2008, falling in financial crisis, recover in 2009, and decreasing in Greek debt crisis 2010, then floating in 2011. EUR decrease sharply in the Greek debt crisis 2010, but appears at AUD/EUR, there was not much float in that time. It was caused the faith of USD comes back after America recovery from the 2008 financial crisis. The demands of EUR move to the demand of USD mainly. It caused the USD raising during the middle of 2010. (EUR/USD, yahoo)
AUD/NZD Comparing with other currency, AUD/NZD appears very special. In the last 5 years, it floated a little and stable around 1.2. The global financial crisis and Greek debt crisis did not make any significant impact. Which also means NZD/USD and AUD/USD had a very similar and close movement (as the graph below NZD/USD). However, AUD/NZD also appears a slightly increasing during the 5 years. Due to the demand of metal ore, AUD had higher demand than NZD. Because the similarity between Australia and New Zealand’s products and location, New Zealand’s economic ties with Australia very strong, also does the currency. (NZD/USD, yahoo)
As the analysis of the five currencies above, the main reason floats the Australia Dollar currency is the price of export products as iron ore, the global financial crisis, and Australia interest rate. Part 2 the function of the global financial system during financial crises
2.1 Current global financial system
Global financial system is a series of institutional arrangements related to the international monetary financial relationship, the global financial activities, including the aspects of the international monetary system, international financial institutions system and international financial regulatory system.
The U.S. financial crisis triggered by the global financial crisis has fully exposed the flaws and shortcomings of the existing global financial system, deep-seated reasons for these problems is the cultural distortions, the crisis also shows that the cultural reconstruction in reforming the international financial system, building a new international financial order process are very important (Dick, …show more content…
2009)
The global financial crisis is a direct reflection of the lack of supervision of financial market. The main flaws and shortcoming of current global financial system is:
(1) Global financial system is not suitable for the development of globalization of economic;
(2) Global financial regulatory system is weak to lead the existing global financial system’s expansion which is disorder and excessive;
(3) Decision making mechanism of global financial institution is bias or biased.
Crisis mitigation relief mechanism is narrower, which has exacerbated the risk factors of the international financial, greatly reduces its proper function, and even helps the outbreak of international financial crisis (Delargy and Charles, 1999).
The financial crisis has fully exposed the current international financial regulatory system has a large number of defects. Therefore, the almost complete deregulation of international system in the western world must be reversed.
Firstly, there is a lack of effective regulation of financial markets. The major western developed countries are lack of effective regulation of financial markets, resulting in excessive financial innovation, far beyond the physical needs of economic development. It is one of the important reason trigger the financial crisis. Secondly, global financial regulation is lack of coordination mechanisms. National financial regulatory authorities lack the necessary communication and coordination in global financial regulation. Thus, it cannot be able to control and block the spread of financial risks on a global
scale.
Finally, the IMF and other international financial institutions did not adequately fulfil its supervisory responsibilities on the global financial markets due to risk accumulation resulting in the international financial system, and eventually led to financial crisis (Bordo, Erceg and Stuckler, 2010, p.642–665).
2.2 Possibilities of financial crises
Exchange rate system is an important part of the international monetary system. Exchange rate arrangements can be roughly divided into three categories, which are the floating exchange rate system, the intermediates exchange rate system and the fixed exchange rate system. Fixed exchange rate system is easy get attacks from international speculative capital. This is because the fixed exchange rate is not entirely credible. Speculative attacks may lead to a currency crisis, forcing a country to abandon the fixed exchange rate regime. The devaluation caused by the high cost of debt of banks and enterprises hold large amounts of unhedged foreign debt, plus the central bank in order to defend the currency exchange rate and enhance the bank profit margins decline in local currency interest rates and corporate cost of domestic debt increased, giving rise to financial and economic crisis (Nicolo et al., 2010).
Floating exchange rate system does not mean the insulation with the crisis. Floating exchange rate regime countries may also suffer from the double whammy of financial and economic crisis. For example, in the United States, the U.S. under the pressure of a huge deficit to maintain a strong dollar, the reason is long-term steady stream of foreign capital inflows. The capital account surplus is largely caused by people's subjective expectations and confidence in the dollar. Once the U.S. economic slowdown and the U.S. stock market bubble economy burst changed the way people expected the U.S. economy and U.S. dollar, the flight of foreign capital will cause the dollar into the huge devaluation pressures. In order to mitigate the impact of capital flight, the Fed is likely to raise interest rates. Interest rate rise will further deepen the economic downturn. Therefore, led to a series of bankruptcy of the enterprise and the financial crisis occurred (Calvo and Reinhart, 2000).
2.3 Advantage of alternative measures
First of all, utilizing Tobin Tax is an efficient and effective way to handle speculation which helps Australian management exchange rate of global financial crisis (GFC) (Garside, n.d.). Tobin Tax, which is known as financial transaction tax, mainly aims to reduce purely speculative transactions through stabilizing exchange rate. "Tobin tax" assists to decrease financial crises from following three conditions: it will assist government to reduce the vulnerability and volatility of the exchange rate; also weaken the financial markets’ influence on the national policy in order to safeguard the government own budgetary and monetary policies; it becomes important resources to get revenue for support global environmental and social projects (Garside, n.d.). Thus, it eases the international capital flows, especially, exchange rate instability which is caused by the rapid expansion of short-term speculative capital flows.
Australian government attempts to utilize speculators’ activities to reduce fluctuation of exports and imports’ price during GFC. There are about 68% employments in actual or potential export and import competing industries (Nevile et al, 2012). During 2008 and 2009, Australian government clear promised that attach primary importance to make preservation of jobs. The Reserve Bank of Australia (RBA) applied fiscal expansion and monetary loosening to produce a low and stable interest rate environment and lead to depreciation of Australian dollar. Speculators believed that Australia dollar would be fall and gave up the activities in Australia due to financial crisis and Australian decrease in interest rate (Nevile et al, 2012). When domestic interest rate was fall, domestic investors preferred to transfer money to foreign countries to get more return. Then, the real exchange rate decreased due to increase in international supply of money, and eventually the increase in net exports (SparkNotes Editors, n.d.). Thus, negative movement of employment level and grow in GDP is decline.
Controlling inflation normally is also considered to priority policy target which results in recovering employment rate and grows in output during GFC. Increasingly more Australian worried about that the growing in mining sector will decrease employment duo to Gregory effect (Nevile et al, 2012). Harcour (2004) indicates that “The Gregory effect refers to a situation where a strong demand for resources causes an appreciation in the exchange rate.” Umaru and Zubairu (2012) said that the relationship between unemployment rate and inflation is negative in the short term in “Philips curve”. Thus, if unemployment rate is low and inflation rate is high, the tightening fiscal and monetary policy increase unemployment rates to low inflation. Otherwise, if unemployment rate is high and inflation rate is low, the expansionary fiscal and monetary policy increases inflation to low unemployment rate. The inflation and the unemployment rate can be a socially acceptable level.
2.4 Disadvantage of alternative measures
Although Australia needs Tobin tax, the implementation is fraught with difficulty. Garside (n.d.) thinks that the pros effects of Tobin Tax are overestimated in the theory. Firstly, Tobin Tax is only a form of administrative intervention on financial markets, and large amounts of capital are left for redistribution. Moreover, Tobin's idea never reaches expected condition due to lack of political consensus. Only feasible way of Tobin Tax is accepted by entire world, but the US will be still an opposition in the expected future.
The government cannot completely control speculators’ opinion, and speculators’ activities are irregular due to GFC. The exchange rate is increase and the Australian dollar has appreciated in 2009, but other developed countries, such as European, exchange rate is decrease, which leads to a large number of speculators to invest money into Australia. Australian exporters are harder competing in global market, and stimulate the de-industrialization of the Australian economy. Thus, unemployment rate is rise, for example, Toyota fired 10% of its Australian workers (Denning, 2012).
Controlling inflation and interest rate juts can reduce global financial crisis in the short run. The correlative relationship between inflation and unemployment is only existed when the economy approached full employment and full capacity. In the long term, people have sufficient time to adjust inflation expectations, Phillips curve shows that the relationship of unemployment rate and the inflation rate can be ignored (Phelps, 1967). Moreover, unemployment only can be reduced at low levels by inflation, and then the other policies, for instance incomes policies, may assist to further relieve this situation. As well as, if the unemployment rate is quite high, the relationship between unemployment and inflation is pretty weak (Nevile et al, 2012). Part 3. Analyse the special drawing (SDR) and trade weighted index (TWI)
Special Drawing Rights (SDR), also known as the ‘Paper Gold’, which is an international reserve asset. (International Monetary Fund, 2011) It is freely usable currencies to give their members countries. (International Monetary Fund, 2011) It was maintained by the International Monetary Fund (IMF) (Special Draw Rights, 2011). When the members had a weakly external potion, the IMF can appoint other members who had a strong external position to purchase SDRs. (International Monetary Fund, 2011) On the other hand; two IMF members can be voluntary exchange between each other. (International Monetary Fund, 2011) According to International Monetary Fund (2011), it was only used four countries’ currencies to exchange which is euro, Japanese yen, pound sterling, and U.S dollar, as a basket of currencies.
Trade Weighted Index (TWI), also called the effective rate, which is a weighted average rate of a country’s currency. It is an indicator that influences this country’s export and import trade by its trading partners. (OANDA, 2012) The Australian TWI was created by RBA in 1974, and is a useful standard to monitor and exhibit competitive trends with some trading partners. (Reserve Bank Bulletin, 2008)
From this line graph, it shows that the value of special drawing rights (SDR) and trade weighted index (TWI) fluctuates over these 5 years, from 2007 to 2012.
More specifically, at first in January, 2007 the value of SDR and TWI stand at only 0.5175 and 63.8. Between February 0f 2007 and the end of 2008, the number of both value fluctuated with an overall downward trend. The value of SDR plummeted, till bottoming out at 0.4399 in November, 2008. Similarly, after 2 month, the TWI also had the lowest point at 53.2. It is interesting notes that there was a very sharp increase over 3 years period to a peak of 0.6874, and 77.9, respectively SDR, TWI.
SDR
As can be known, there was a global financial crisis was happen in end of 2008, which led to the SDR had a bottom. In the wake of the GFC, the IMF was growths up their interest rate of SDR (Jeff Chelsky, 2011) In addition, the G20 leaders called for an allocation of SDGs in response to the global financial and economic crisis.’ (ActionAid USA, 2010) Within less than 5 months, the members’ countries got SDRs, which worth of about U.S. $250 billion. (ActionAid USA, 2010) It aimed to create a financial system that is free currencies exchange, which keep the balances foreign exchange market, during GFC. (John Williamsion 2009) As a result, it improved the value of SDR after 3 years period. This is reason that the SDR had a huge fluctuated from 2007 to 2012. However, Based on the fluctuation of AUD, it is easy to find that had a similar situation within those years. Because Australia also is the member of IMF, which is means that though buy or sell SDR to improve or change its value of AUD in the exchange market.
TWI
Within the GFC, the trading of import and export also effect, which dropped the lowest level. In Australia, the Austalian Dollar was depreciation between 2007 and 2008.(J.W. Nevile, 2012) During the impact of GFC, the AUD reached at US 0.9626. (Ken Edge 2011) Additionally, the USD also appeared depreciated; it is the reason that pushed the AUD up. (Ken Edge 2011) Therefore, it led to a bottomed at Australia commodity, which grew the prices for its exports, like raw material. (Ken Edge 2011)
For TWI, there is a case of TWI of Australia Dollar with RMB. Like we said, in this index, the RMB was the highest point in this index. However, the Japanese Yen is secondly rank. Reference List
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