Australian Dollar

1101 Words 4 Pages
Explain how movements in the Australian dollar can affect the performance of the Australian economy?

Exchange rates measure the relative value of a currency in exchange for a foreign currency. The exchange rate affects Australia’s economy most directly through changes in the demand for imports and exports. Australia’s adoption of a floating exchange rate in 1983 has had major implications on Australia’s relative international competiveness, terms of trade and the balance of payments. Over the past decade the Australian dollar has appreciated strongly, rising from US$.50 in 2001 to a peak of US$ 1.10 in 2011.

The forces of supply and demand determine the the price of the $AUD in terms of another currency. The $AUD is subject to fluctuations
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In recent years the high Australian dollar has reduced Australia’s financial obligations of interest and debt repayments. This reflects the fact that around 60% of Australia’s foreign debt is denominated in foreign liabilities. Through the valuation effect, an appreciation will decrease the Australian dollar value of debt denominated in foreign currencies, consequently reducing the value of Australia’s debt servicing costs. The proportion of debt denominated in Australian dollars decreased from 47% in 1995 to 39% in 2008 due to an appreciating $AUD. This will reduce the value of net primary income outflows as less funds are flowing out of Australia to service debts, thus improving the net primary income deficit and reducing Australia 's CAD. This can be seen during late 2013, when Australia’s CAD reduced to 3.3% of …show more content…
A strong Australian dollar causes Australian exports to become more expensive, thus the international competitiveness of non-commodity exports will decrease. As a result manufacturing, agriculture and tourism industries have suffered significant losses in terms of share of Australian exports and output and in terms of employment. This is made evident in the significant decrease in the growth of tourism from 17.5% in 2006 to 7.8% in 2008. This has created a dual speed economy (the Dutch disease), where the accelerating mining sector (accounting for 64% of Australia 's total exports in 2013) has significantly reduced the ability of non-commodity industries to compete on an international level. This is reflected in the decrease of Australia 's total employment in manufacturing sectors from 20% to 9% in 2011. However the release of labour and capital previously utilised by inefficient industries, will be reallocated to the expanding mining sector. Consequently, economic activity will increase, in turn leading to higher real incomes for Australians and higher living

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