This is known as foreign exchange, sometimes abbreviated as forex. The demand for currency sets the value of each currency - this is known as the exchange rate. Exchange rates work on a ratio of one-to-one. The US dollar is usually the currency against which the Australian dollar is measured.
This is known as foreign exchange, sometimes abbreviated as forex. The demand for currency sets the value of each currency - this is known as the exchange rate.
Exchange rates work on a ratio of one-to-one. The US dollar is usually the currency against which the Australian dollar is measured.
See image 1 Effect of exchange rates Like interest rates, exchange rates fluctuate in response to a number of factors. Rises and falls in the exchange rate can have both negative and positive effects.
Depreciation is the word used to describe a fall in the value of the Australian dollar. The dollar can fall quite a large amount over time. In recent years it has hovered at around US cents, but inEconomics appreciating aus value of one Australian dollar went below US50 cents for the first time.
Depreciation lowers the value of the dollar and thus allows owners of foreign currencies to buy more Australian goods. As such, depreciation will make Australian exports cheaper and thus more desirable on the international market. The cost of imports, however, will rise, given the relative weakness of our currency.
In this scenario, Australian businesses are more competitive globally, which is good for the economy, but Australian consumers pay more for imported goods - not to mention the higher cost of international travel - and so they experience this depreciation as a negative.
Appreciation in the Australian dollar has the opposite effect. The competitiveness of Australian exports declines, but the price of imported goods, overseas travel and foreign investments also falls, which benefits the consumer. See image 2 Factors affecting exchange rates Economists identify many factors that can affect the strength of a currency.
Investors and currency traders also look to the political stability of the country, as a country with a stable political climate will not experience extreme currency movements. The economic condition of a country can determine the value of its currency.
Generally, the brighter its economic prospects the stronger its currency. Government policies and political events are also closely watched by currency traders.
Traders in currency also pay attention to the Gross Domestic Product GDP of a country, the export or trade figures, and whether or not the national debt is excessive. Another major factor that can affect the exchange rate is the level of interest rates in a country. This is quite a complex area, but in general, higher domestic interest rates make a country more attractive to foreign investment, and also keep inflation down, which pushes up the value of a currency.The Reserve Bank of Australia (RBA) kept interest rates unchanged on Tuesday in a widely expected move, but the Australian dollar dropped as the central bank signaled that it was unlikely to raise.
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