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Fluctuations in Exchange Rates in Australia

In: Business and Management

Submitted By missymaryy
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TOPIC 2 – Explain the various factors that may cause fluctuations in foreign exchange rates. In the case of Australia, what industries are vulnerable when the foreign exchange rate is high? Explain your answer fully.
An exchange rate is the measure of value of one currency against another currency; for example, AUD $1 = USD $1.03 (indirect quotation). Exchange rates are dynamic in that they are changing throughout every trading day. Basically, fluctuation is caused by demand and supply of the currency.
As in any market, price rises with shortages of supply and increases in demand. Price falls with reduced demand and increased supply.
Figure 1.1

Demand curve
The demand curve for Australian currency shows the quantity of Australian Dollar (AUD) that buyers are willing to purchase at each possible exchange rate.
Demand arises from several sources * Exports – Foreigners who wish to buy Australian goods and services * Foreign tourists and international students in Australia * Australians firms borrowing abroad * Foreigners investing in Australia (capital inflow, e.g. assets, dividends etc) * Current transfers into Australia * Speculators who expect the value of AUD to rise
The curve is downward sloping (Figure 1.1 – blue) since it is reasonable to expect that the cheaper the price of the local currency, the greater would be the demand for the currency by the rest of the world.

Supply Curve (red)
Supply curve for Australian currency shows the quantity of AUD supplied by Australian citizens at each possible exchange rate.
Supply will be determined by: * Imports – Australians who wish to purchase foreign goods and service * Australian tourists and students going abroad * Australians lending overseas * Australians investing overseas (capital outflow, e.g. investing in assets, dividends, etc) * Current transfers made out of Australia…...

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