The Australian exchange rate - it's complicated!

Prices are set by demand and supply in a free market and that applies to exchange rates - the price of one currency in terms of another. For exchange rates there are, however, many competing influences on demand and supply and government monetary policy has a significant impact.

The purpose of this post is not to say too much because The Guardian article linked below says a great deal you need to know.

The Australian dollar is presently experiencing a modest rise in value (from around 70 cents to 75 cents to the US$). This is spoiling the hoped for improved competitiveness of Australian non-mining exports which suffered from the very high value of the dollar caused by the mining investment boom.

The article is wide ranging, explaining some current influences on the exchange rate and the importance of monetary policy of both the home country and other countries on exchange rates.

The question I would want to consider is about if a country should really rely on devaluations (or depreciation's) to maintain competitiveness and so economic success? A fall in the exchange rate might provide a short term boost to exports (Marshall-Lerner conditions allowing) and so higher Aggregate Demand. However long term economic success is based on the level of productivity and comparative advantage.

The Guardian article is here

This article is important for VCE and IB students. VCE students need to understand influences on Monetary Policy and the level of the exchange rate and how it can affect the economy. For IB students it is also important to understand how to evaluate the effects of a change in policy or the exchange rate. Looking at the long term vs. short term effects of a change offers one possible path to evaluation.

 

The A$ vs US$ over the last year