Exchange Rate Essay Depreciation

1243 words - 5 pages

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 ...view middle of the document...

During 2014 growth of the December quarter was expected to reach 1% and instead only reached 0.5% causing the economic growth for the year to only reach 2.5%. A clear gradual downtrend in economic growth over the past decade is evident, with only 2 clear spikes above 4% within the past 10 years. Speculators believe that this trend in slowing economic growth will continue, therefore foreign investors become more reluctant to invest in the Australian economy resulting in a decreased demand for the AUD and a depreciation in the Australian currency. It is demonstrated in Figure 1 below, that Australia is falling behind the GDP growth rate of the world and major trading partners due to the end of the mining boom. Mining investment has fallen from 6% of GDP to its long term figure of 1-2% of GDP, and it is evident that non-mining investment has failed to cover this fall.

The demand for Australian exports also dramatically influences the demand for the AUD. When overseas consumers buy Australian goods and services, they must convert their currency into Australian dollars in order to pay the exporters. The demand for Australian exports is influenced by the tastes and preferences of overseas consumers for Australian exports. For example the tourism industry was one of Australia’s largest exports throughout the 1990s, however the event of 9/11 reduced the number of tourists visiting Australia and consequently, the demand for the AUD.

International competitiveness heavily influences the demand for Australia’s exports. In order to compete in the global market, Australia’s goods and services must be as cheap as its international competitors. If Australia’s inflation rates and costs are higher than its overseas competitors our goods will be more expensive and won’t be internationally competitive. Australia’s inflation rate increased from 1.2% in July 2012 to 3% in July 2014. This high inflation rate has caused a loss of export markets, reducing the demand for AUD and forced a depreciation of the Australian dollar.

The major factor influencing the demand for exports is the change in commodity prices and terms of trade. The AUD is seen as a “commodity currency” that rises and falls with changes in the terms of trade. Australia’s commodity boom has slowed during 2014/15 causing a decrease in demand for Australian exports, particularly coal and iron ore. Figure 2 indicates that the index of commodity prices has fallen by 15.6% in AUD terms over the past year. The largest contributor to this decline was the price of iron ore hitting an all time low of $US50 a tonne on the 2nd of April 2015. This decrease in price is mainly due to a rapid increase in iron ore supply combined with moderating growth in China’s steel production. As a result of the...

Other Essays Like Exchange Rate Essay - Depreciation

Analyse the Effects of Fluctuations on the Aud for the Australian Economy

995 words - 4 pages Analyse the effects of fluctuations of the AUD on Australia’s economy. A fluctuation in the exchange rate has profound effects on the Australian economy. Any slight movement, either up (appreciation) or down (depreciation), can have drastic, domino like effects. These effects will firstly be felt with importers and exporters, but slowly seep through the economy to influence the way in which the average person lives their life. In recent

Fall Of Rupee Essay

1072 words - 5 pages one is that if country X records the inflation rate at 10pc per annum while country Y’s is only 2pc, the bilateral exchange rate of country X should result in depreciation of 8pc vis-à-vis country Y. Hardly any country has economic ties with only one country. Therefore, a trade-weighted exchange rate is used where weights correspond to the relative share in trade with each country in a given basket. The US dollar dominates the multilateral

Exchange Rate

3269 words - 14 pages produced in Australia and demand for imports will rise.  Also, tastes and preferences of Australian consumers change over time, and an increase in the desirability of goods and services produced overseas will increase supply of AUD on the foreign exchange market. When supply of the dollar increases, there is generally a depreciation of the value of the currency.  THE GOVERNMENT ROLE IN THE EXCHANGE RATE  The government can ‘manage’ the

Managing Currency Risk with Financial and Operational Hedging Techniques

2196 words - 9 pages sell or buy in the future. Curb-exchange and cash transaction are the feathers of forward contact. This essay will focus on two operational hedging techniques, market selection strategy and plant location strategy. The first one suggests that firms should diversify products into many markets as possible. The second one suggests that firms need to find out which location will be good for setting up production plant. Advantages and

Foreign Exchange Markets

994 words - 4 pages non-US dollar currencies. These rates are called cross exchange rates. 2.2) Bid/Ask Spread When banks or brokers facilitate currency transactions they charge a fee for their service. In many cases these fees come from the difference between the bank´s bid and ask quotes -> called the bit/ask spread. 3) Exchange Rate Movements Prices and currencies can fluctuate. 3.1) Currency Appreciation and Depreciation

How to Control Exchange Rate in Order to Improve Vietnam’s Competitiveness and Trade Balance

2528 words - 11 pages : * A depreciation in the Vietnam’s real exchange rate means Vietnamese goods have become cheaper relative to foreign goods. This change encourages consumers both at home and abroad to buy more Vietnam goods and fewer goods from other countries, which improves the international competitiveness of domestic goods. * In addition, resources for production will be transferred to the domestic industries that can now compete more effectively against

Comparing Ifrs to Gaap

872 words - 4 pages Comparing IFRS to GAAP Essay In the Accounting industry, there are various principles and guidelines by which financial accountants, analysts, and organizations need to abide by. The International Accounting Standards Board (IASB) issues standards (IFRS) that have been adopted by the United States and several countries outside of the U.S. (University of Phoenix, 2013). The IFRS along with Generally Accepted Accounting Principles (GAAP

The Exchange Rate

2769 words - 12 pages country’s economy to be quickly adjusted to changing market conditions. If the balance of payments deficit is violated, the floating exchange rate system allows to adjust a currency outflow or inflow into the country; this automatically makes the domestic goods either more competitive (in case of appreciation on the currency market) or makes foreign goods more competitive (in case of the currency’s depreciation). The second advantage of

International Risk Management: an Analysis of 3m's Foreign Risk Management

5283 words - 22 pages 2.1. Current Strategy to Manage Exchange Rate Risk 10 2.1.1. Cash Flow Hedging 10 2.1.2. Net investment hedging 13 2.2. Currency Translation Effects on Business Segments 14 3. Appreciating and Depreciation of Domestic Currency and Foreign Exchange Rate Risk Management 15 3.1. 3M’s Domestic and International Transactions 15 3.2. Appreciation of the Domestic Currency 17 3.3. Depreciation of the Domestic Currency 17 4


4090 words - 17 pages short term versus a prolonged one. Over short-term foreign investors see inflation as a temporary problem and still invest in the domestic economy. If inflation becomes a prolonged one, it leads to overall worsening of economic prospects and capital outflows and eventual depreciation of the currency. Apart from this, inflation also helps understand the real changes in a value of currency. Real exchange rate = Nominal Exchange Rate* (Inflation of

Financial Market

5560 words - 23 pages considered two variables-exchange rate and stock price. The researchers of both studiesbelieve that the sharp depreciation of the Thai baht causes depreciation of other currencies in the region which in turn contributes to the collapse of the stock markets of that region. But the findings of Granger causality and impulse response function of Khalid and Kawai’s (2003) study does not show strong evidence for such contagion among different markets

Related Papers

Temporal Vs Current Method Essay

2404 words - 10 pages rate was LC1.15/$. The average exchange rate during 2001 was LC1.18/$. On December 31, 2002, the exchange rate was LC1.22/$. The average exchange rate during 2002 was LC1.20/$. 15 The Current Rate Method: An Example Foreign Subsidiary, Inc. Assets as of December 31 (in LC) 2000 Cash Accounts receivable Inventory Current assets Fixed assets Accumulated depreciation Net fixed assets Total assets 41 360 210 611 1,032 180 852 1,463 2001 204 492

Pricing To Market, Implication And Evidence

2277 words - 10 pages model are consistent with Krugman’s argument in 1990, suggesting that PTM is responsible for the real exchange rate volatility, dramatically. Precisely, in a large PTM sector, a depreciation of the currency does not tend to make customers spend more money on foreign goods than before. That is how the exchange rate response is magnified. Therefore, PTM takes the responsibility for the increase in exchange rate variability and the PPP puzzle as

Case Analysis

890 words - 4 pages . Calculate new total costs for both manual and automated processes. g. Calculate new incremental costs savings. 5.4. Recompute the peso discount rate. 5.5. Assume that PPP holds. What will happen to expected peso/euro exchange rates if the inflation rates in both countries are the same? 5. Suppose Groupe Ariel expects a significant real depreciation of the peso against the Euro. How should its financial analyst

Asia's Export Performance Essay

2719 words - 11 pages exchange rate should be established which will bring the official rate into line with the free market rate. This can be achieved through depreciation of the Rand. These reforms therefore will enhance the competitiveness and enable exporters to compete internationally. The general view is that currency depreciation enhances export competitiveness (Edwards, 2006). Edwards and Willcox (2003) suggest that in the long run, the most appropriate