An Exchange Rate Measures The Value Of A Dollar Essay

An Exchange Rate Measures The Value Of A Dollar Essay

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An exchange rate measures the value of a dollar in comparison to another such as the Australian dollar in US dollar terms. Although it has slightly fallen in recent months Australia’s exchange rate has for the past decade been steadily appreciating with it rising above parity in 2011-2012. This has been fuelled by the commodities boom, high levels of investment into Australia leading to a sustained high demand for the AUD along with activity in China and USA. The appreciating dollar has had a negative impact on domestic economic activity by decreasing the competitiveness of domestic firms and exports whilst encouraging import expenditure. However the high dollar has reduced imported inflation, acted as a shock absorber to the mining boom and in theory decreased the CAD which will improve economic activity in the long run.
Australia’s steadily appreciating dollar has largely been fuelled by foreign investment and commodities exports. Since the floating of the Australian dollar in 1983 its appreciation has been a result of increasing demand for the Australian dollar. This demand is due to the great amount of foreign investment flowing into Australia helped by the deregulation of the financial sector along with onset of globalisation. As there is an increase in demand, the exchange rate curve shifts to the right from D to D1. As a result the price of the dollar increases from P1 to P2 and quantity increases from Q to Q1. From 2003 Australia has experienced a rapid growth in its mining sector which has been powered by China and other emerging economies’ demand for our natural resource exports. When countries purchase our exports they must first purchase our dollar first. The development of emerging economies increasing demand for comm...

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... policies, promoting sustained economic activity in the long term. This is supported by the current inflation rate sitting at 2.4%, giving room for the RBA to cut interest rates, encouraging consumption and investment as Australia transitions from mining-led growth.
The falling of the dollar to 93 USD has impacted on economic activity in converse to the impacts of a high dollar. It has encouraged domestic consumption as imports are more expensive, while improving the competitiveness of domestic firms and the export sector. The low dollar, along with the cash rate cut helps Australia restimulate economic activity in other sectors as commodities demand from countries like China eases. Despite claims that imported inflation is up as a result of the falling dollar the impacts are still occurring however the low dollar has, for now, been beneficial to economic activity.

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