The Impact Of Australian Dollar On 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 due to the level of financial inflows into Australia, interest rates and inflation. Over the past decade the AUD has been on an upward trend against both the USD and the TWI. Since its recent trough in June 2010, the AUD has appreciated by around 21 per cent against the USD and by around 14 per cent against the TWI. However, the recent depreciation to US$0.71 in December 2015 has reflected changes in the domestic and international business cycle.
An appreciation of the real exchange rate has had both diverse and extensive impacts on the Australian economy. In the short term, a major implication of an appreciation of the Australian dollar is the improvement in Australia’s terms of trade as exports become more expensive and imports…