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Relation between AUD and USD

Question:

Discuss about the Review Of Australian Economics And Finance.

Over the past few decades, the economy of Australia has witnessed several fluctuations in its dollar rate. The changes in the rate of dollar cause changes in the prices of local and foreign products and services, which further leads to changes in inflation rate and interest rates. The changes in the exchange rate affect the industries, which are dependent upon the exchange rates and results in the expansion of few industries while the contraction of the others. The Australian dollar plays a vital role in the economic and financial system of the country. The exporters, importers, domestic investors, and the foreign investors are highly affected by the fluctuations in the price of the Australian dollar (Cavoli and Rajan 2014). 

The level of demand for a currency determines its market price. When there are more buyers of Australian dollar, its value shall go up whereas; when there are more people wanting to sell Australian dollar, its value shall go down. The buying and selling decision of the individuals are affected by their outlook for global growth, difference between interest rates in Australia and US, performance of the Asian currencies and the changes in the commodity export prices in Australia (Ferraro, Rogoff and Rossi 2015). The following are the key findings:

  • The rate of exchange directly affects the economy of a country through the changes in the demand for import and exports. Fall in the value of domestic currency results in more competitive exports in the international market while rise in the value of domestic currency results in more competitive imports domestically. Fall in the value of domestic currency makes the goods and services produced within the country cheaper than the foreign production, which provides greater benefits to the industries having high export share.
  • In Australia, the mining, transport and the manufacturing industries hold the maximum export share whereas; the construction, education, health and business services industries are the least exposed to exports.
  • Fall in the value of Australian dollar increases the cost of goods and services imported from other countries, which in turn raises the overall costs (Apergis 2014).
  • The difference in the interest rates of the Reserve Bank of Australia and the Federal Reserve affects the value of Australian dollar and US dollar.
  • The value of Australian dollar is highly dependent upon the commodity prices as Australia is the largest exporter of coal and iron ore.

Figure 1: Relation between AUD and USD

(Source: Bussière, Delle Chiaie and Peltonen 2014)

The aim of the research is to analyze the economic, social and business issues related with the fluctuation in the Australian dollar. The research aims at finding the trends of Australian dollar in the past three years and its social and economic impact on Australia. 

The people mainly affected by the movement in the dollar are the importers, exporters, manufacturers and the mining industry. The movement in the Australian dollar highly affects the number of imports and exports. For instance, when the value of Australian dollar falls, the goods and services available within the country becomes cheaper, this results in the reduction the number of exports and also boosts the domestic industries. On the other hand, when the value of Australian dollar rises, importing the foreign products and services becomes cheaper; this increases the number of imports (Lustig, Roussanov and Verdelhan 2014).   

The major issues affecting mining industry in Australia due to movement in dollar is the change in the demand for coal and iron ore. Since Australia is the largest exporter of coal and iron ore in the world, the changes in the valuation of Australian dollar with respect to US dollar largely affects the exporters. Rise in the value of domestic currency makes the goods and services produced within the country costlier than the foreign production, which provides greater losses to the industries having high export share (Ilzetzki, Reinhart and Rogoff 2017). The mining industry has the largest export share in Australia therefore; it faces severe issues when there is any movement in the Australian dollar.

Key findings

Another industry that faces issues due to the movement of Australian dollar is the manufacturing industry. The manufacturers of export items are highly affected by the changes in the value of Australian dollar. This is because when the Australian dollar becomes stronger, the demand for the export items falls as a result of higher prices. The foreign countries have to spend more money to buy the exported items and many a times they find suppliers of the same products in some other country where the products are available at cheaper rates. Therefore, the rise in the Australian dollar renders manufacturers as the ultimate losers. However, despite the depreciation in the Australian dollar, the volumes of manufactured exports have been stable since the year 2012 (Reboredo and Rivera-Castro 2014). The Australian manufacturers have been facing intense competition from the industrial development in the lower- cost nations especially China. Several manufacturers have also faced issues with their capacity to change production as a result of the delays in their supply chain. 

In case of the mining industry, the movement in the Australian dollar largely affects the export quantity and export prices of the coal and iron ores. The economy of the country is highly dependent upon the export of coal and iron ores (Haque, Topal and Lilford 2015). Any disturbances in the value of Australian dollar shall have huge social and economical impact on the country.  A large number of people are involved in the mining industry and any loss in this industry shall affect the workers to a large extent. Similarly, in case of manufacturing concerns, a large number of manufacturers are dependent upon exports for generating their revenues. Any change in the value of Australian dollar affects their business and the amount of revenue generated (Di Iorio and Faff 2015). When the Australian dollar becomes stronger, the demand for the export items falls as a result of higher prices. This lowers the demand for exports and creates trade imbalances. Severe conditions might compel the manufacturing concerns to shut their operation. This shall affect the lives of the people employed in those units and shall adversely affect the GDP of the country. This shall not only harm the economy of the country but shall also affect the society on a whole (Shu, He and Cheng 2015).  

The movement of Australian dollar shall affect all the industries to some extent and shall ultimately affect the exports and imports of the country, which shall ultimately have social and economic impacts on the country.

Impact on Industries in Australia

The following are the research objectives:

  • To analyze the impact of the movement of Australian dollar on the mining industry in Australia
  • To analyze the impact of the movement of Australian dollar on the manufacturing businesses in Australia.
  • To evaluate the impact of mining and manufacturing businesses on the economy of Australia due to the movement in Australian dollar
  • To understand social and economic impacts of these businesses in Australia.

Hypothesis:

H0: There is no impact of movement of Australian dollar on industries in Australia

H1: The movement in the Australian dollar affects the mining industry in Australia

H2: The movement in the Australian dollar affects the export related manufacturing concerns in Australia

The following are the research questions:

  • What is the impact of the movement of Australian dollar on the mining industry in Australia?
  • What is the impact of the movement of Australian dollar on the manufacturing businesses in Australia?
  • What is the impact of mining and manufacturing businesses on the economy of Australia due to the movement in Australian dollar?
  • What are the social and economic impacts of these businesses in Australia?

It is mandatory to keep into consideration the ethical issues while conducting a research. It verifies the authenticity of the research and ensures that the research contains genuine information. In this research study, the data has been collected from secondary sources such as newspaper, articles, books and authentic websites. The data has been collected to be used only for commercial purpose. The information has been kept confidential and appropriate referencing has been provided to make the research study look more reliable and genuine (Manalo, Perera and Rees 2015). 

The businesses must research about the currency movements of the competing countries so that they can identify the level of competitiveness and devise suitable strategies for remaining ahead of the competitors. The companies must also study the movement of Australian dollar in the past ten years and the impact it had on their business or similar businesses and the manner in which the other businesses faced the situation. This shall help them to identify the possible strengths, weaknesses, opportunities and threats in the external environment (Downes, Hanslow and Tulip 2014).

Conclusion:

In this research study, the impacts of exchange rates have been analyzed and the industries that are highly affected by these changes have been identified. The movement of Australian dollar is an important determinant of the exports and imports taking place in Australia. Several reports have stated that 10% of depreciation in the value of Australian dollar results in the overall increase of exports by 3% and overall decrease in the imports by 4% (Garnaut, Baxter and Frueger 2017). This has the capability of increasing the GDP of the country by 1.5% over two years while maintaining the trade shares at present levels. The rate of exchange directly affects the economy of a country through the changes in the demand for import and exports. Fall in the value of domestic currency results in more competitive exports in the international market while rise in the value of domestic currency results in more competitive imports domestically. Fall in the value of domestic currency makes the goods and services produced within the country cheaper than the foreign production, which provides greater benefits to the industries having high export share (Moosa 2016). Manufacturers have been the most responsive to the changes in the value of Australian dollar however; their empirical relationships have weakened lately. The mining industry and the manufacturing concerns are the most affected with the movement in the Australian dollar. The strength of the Australian dollar depicts the weakness of US dollar and it also represents the level of commodity prices in Australia. Strong  Australian dollar is a result of high interest rates and the preparedness of global investors to take on ‘risk’ in order to enhance returns in a very low-interest rate environment. A stronger Australian dollar means that the products and services priced in the domestic currency are costlier when converted into US currency, which refrains the importers in the foreign countries to import products from Australia. This compels the Australian exporters to cut their prices. This results in narrower profit margins and even losses in some cases (Coudert, Couharde and Mignon 2015). 

References:

Apergis, N., 2014. Can gold prices forecast the Australian dollar movements?. International Review of Economics & Finance, 29, pp.75-82.

Bussière, M., Delle Chiaie, S. and Peltonen, T.A., 2014. Exchange rate pass-through in the global economy: the role of emerging market economies. IMF Economic Review, 62(1), pp.146-178.

Cavoli, T. and Rajan, R.S., 2014. Intervention and Exchange Rate Regime Choice in Asia: Does the US Dollar Still Matter? (Doctoral dissertation, World Scientific Publishing).

Coudert, V., Couharde, C. and Mignon, V., 2015. On the impact of volatility on the real exchange rate–terms of trade nexus: Revisiting commodity currencies. Journal of International Money and Finance, 58, pp.110-127.

Di Iorio, A. and Faff, R.W., 2015. The effect of intervaling on the foreign exchange exposure of Australian stock returns.

Downes, P.M., Hanslow, K. and Tulip, P., 2014. The effect of the mining boom on the Australian economy.

Ferraro, D., Rogoff, K. and Rossi, B., 2015. Can oil prices forecast exchange rates? An empirical analysis of the relationship between commodity prices and exchange rates. Journal of International Money and Finance, 54, pp.116-141.

Garnaut, R., Baxter, P. and Frueger, A.O., 2017. Exchange rate and macro-economic policy in independent Papua New Guinea. Canberra, ACT: Development Studies Centre, Research School of Pacfic Studies, The Australian National University..

Haque, M.A., Topal, E. and Lilford, E., 2015. Relationship between the gold price and the Australian dollar-US dollar exchange rate. Mineral Economics, 28(1-2), pp.65-78.

Ilzetzki, E., Reinhart, C.M. and Rogoff, K.S., 2017. Exchange Arrangements Entering the 21st Century: Which Anchor Will Hold? (No. w23134). National Bureau of Economic Research.

Lustig, H., Roussanov, N. and Verdelhan, A., 2014. Countercyclical currency risk premia. Journal of Financial Economics, 111(3), pp.527-553.

Manalo, J., Perera, D. and Rees, D.M., 2015. Exchange rate movements and the Australian economy. Economic Modelling, 47, pp.53-62.

Moosa, I., 2016. Exchange rate forecasting: techniques and applications. Springer.

Reboredo, J.C. and Rivera-Castro, M.A., 2014. Can gold hedge and preserve value when the US dollar depreciates?. Economic Modelling, 39, pp.168-173.

 Shu, C., He, D. and Cheng, X., 2015. One currency, two markets: the renminbi's growing influence in Asia-Pacific. China Economic Review, 33, pp.163-178.

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