Factors Affecting the Exchange Rate of Aud/Usa

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Analysis about factors affecting Australian Dollar US Dollar exchange rate (2006- Q1 2010)

Project Report
Final Project in Banking and Finance (FP 238)
Raffles College of Higher Education

I. Introduction

2.1. Background

Most of the country in the world will have export and import and they will use money to pay for it. Each country will have their different unit of money, which is called as currency. Currency is a medium that is used in the world to be the media as payments. Each country have their own currency, some small country are using the same currency as their surroundings e.g. USA – US Dollar (USD); Germany, Spain, Greece, etc. – Euro (EUR); UK – Poundsterling (GBP); Singapore – Singapore Dollar (SGD); Australia – Australia Dollar (AUD). Therefore one currency will be related to the other currency in the other country, in other word, if country A is facing recession, all country that is located near country A will be facing the same problem and not only the surrounding, but for those country who have import and export agreement with country A will be affected as well. Therefore there is always a fluctuation in the exchange rate. This fluctuation will fluctuate every time, even in a second, it might have fluctuates. Fluctuation in the exchange rate is divided into upward market trend (bull market) which indicate that a currency of a country is getting stronger compare to the other countries’ and downward market trend (bear market) which indicate that a currency of a country is getting weaker compare to the other countries’. “The exchange rate fluctuates. Sometimes it rises and sometimes it falls. A rise in the exchange rate is called an appreciation of the dollar, and a fall in the exchange rate is called a depreciation of the dollar.” (Parkin, 2010).

2.2. Statement/ Problem to investigate

There are many types of investment, one of it, is Foreign Exchange (Forex). This Foreign Exchange investment is done by exchanging one currency to other currency and sells it back, this investment is categorized as profitable investments, which means you can gain profit from it, but in reality it turns out the other way, many investors are making huge losses. Most of the investors only look at the trend from a graph then they will do the investment, this is why many investors making huge losses, they should not only look at the trend from a graph, but they must aware that there are other factors that is affecting the exchange rate such as the interest rate, inflation, GDP, monetary and fiscal policy, etc. and the exchange rates of a country will change because of these several factors. In this report the several factors will be discuss using the Australia and USA contexts.

2.3. Objective

By knowing the problem that investors are not aware about the factors, therefore the objective of this report is to analyze the factors that are affecting the Australia Dollar US Dollar exchange rate and from reading this report, it hopes that it can create and awareness for those investors who are going to invest (buy, sell) in Australia Dollar and US Dollar in Foreign Exchange.

II. Theory of Foreign Exchange

3.4. Hard Currency and Soft Currency

In investing in Foreign Exchange Rate/ Currency, the terms for “buy” and “sell” is well known. The investors will put their position into a “buy” position if the investors expect that the price of that currency will increase (going up) and they will put their position as “sell” position if they expect that the price will decrease (going down). In buy and sell the currency, the investors will buy and sell the currency that they want to invest their money in. The currency in the world is divided into two types, first one is called “Hard Currency” and the second one is called “Soft Currency”.

Hard Currency is a currency that is often use as the media of payment in international transaction, because this currency is quite stable. This...
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