Pros and Cons of an Appreciation in Australian Dollar

Topics: Inflation, Foreign exchange market, Economy of Australia Pages: 5 (1676 words) Published: October 28, 2012
Pros and Cons of an appreciation in Australian dollar
In the recent days, Australian dollar has witnesses a significant appreciation and keeps strong. To put in a simple way, appreciation of Australian dollar, for our ordinary consumer, means we can buy more goods than before using the same amount of money. This is caused by an increase of purchase power of Australian dollar. As for choices of consumers, foreign goods are especially welcomed for the simple reason that they become relatively cheaper than local produced goods, which is due to the high exchange rate. In addition, for overseas student, they will cost more than before to afford the expensive tuition fee. The tuition fee in Australia is kept the same amount; however, because of the high exchange rate of other currency over AUD, overseas students have to spend more. According to the historical statistics of Australian dollar over US dollar, the rate fluctuates below 1 during 1986 to June 2010. However the rate reached parity in Oct of 2010. Afterwards, the rate was beyond 1 and Australian dollar begins to keep strong. The reason why Australian dollar keeps strong and the effects of appreciation on consumers and investors should be analyzed by macroeconomics. The reason of the appreciation in Australian dollar is that the strong domestic economy of Australia and the sluggish of the United States’ economy. For the first reason, after the 2008 financial crisis, the Australian local economy remains stable and global inflation leads to prices fluctuate which would affect the Australian dollar appreciation. AUD is the commodity money and the Australian dollar was influenced by the commodities, especially the mining industry. Therefore, the AUD will appreciate because of the increasing of the commodities’ price. Let’s elaborate the strength of the Australian economy more details. There is no doubt that the Australian economy in recent years maintained a good momentum of development, therefore, the exchange rate rise reflects Australia a good economic growth. Australia is rich in natural resources; there is a lot of coal, iron ore and natural gas exports. So long as the Australian economy running smoothly, we can expect to the exchange rate of AUD will maintain in a relatively strong position. “Australia's employment growth is very strong, about half of the U.S. unemployment rate. Furthermore, investment growth is also very strong. So Australia will be realized in 2013 budget surpluses.” said by Australia finance ministers Swan. Global inflation leads to commodity prices, especially in commodity prices, such as coal, iron ore, etc, and the impact of AUD for commodities, so one of the main currency appreciation larger AUD. The financial storm to all countries have effect on the economy, but as a commodity exporter, relative to the AUD international financial major currencies dollar terms, more insurance, plus a Australia dollar belong to high interest rate currencies, more easily to be buying a hedge. For the above analysis we know that the main reason of raising AUD is the global commodities prices are raising dramatically and good employment situation driven the increase in GDP for the local reason. When it comes to the factors which come from outside of Australian, the weakness of US economy and the loose monetary policy in US could be the other reasons. First of all, the US economy had an unemployment rate of 9.1% in August, compared to Australian, 5.0% in July. Based on the Reserve Bank of Australia, Australian GDP for second quarter 2010 was 3.3% for the year ending June 2010. In contrast US GDP for the year ending 2010 was 2.4%. Moreover, the projected recovery in consumer spending did not occur. The rise in food and energy prices outpaced the gain in nominal wages, causing real average weekly earnings to decline in January, while the continued fall in home prices reduced wealth for the majority of households. As a result, real personal consumer expenditures rose...
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