Pros and Cons of an Appreciation in Australian Dollar free essay sample

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. We will write a custom essay sample on Pros and Cons of an Appreciation in Australian Dollar or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page 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. â€Å"Australias 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 at an annual rate of just about 1 percent in January, down from the previous quarter’s 4 percent increase. That pattern of rising prices and declining real earnings repeated itself in February and March, with a sharp rise in the consumer price index causing real average weekly earnings to decline at an annual rate of more than 5 percent. There is no doubt that consumer`s confidence level fell sharply and consumer spending remained almost flat from month to month. Furthermore, a loose monetary policy occurs when the money supply is expanded and is easily accessible to citizens to encourage economic growth. According to the Global Futures amp; Forex, the Federal Reserve announced that it will keep rates low, and that it will continue with plans for an asset buy from the Treasury. The Federal Reserve (Fed) has lowered the cash rate to 0. 250% and has undertaken quantitative easing to lower longer-term interest rates, with a second round of easing planned. Quantitative easing involves a central bank purchasing financial assets from banks and other private sector businesses with new electronically created money, thus increasing the money supply. And then it weakens the US dollar against other currencies. Furthermore, while US interest rates remain low for the short term, investors will seek out higher-yielding opportunities, such as Australian dollar denominated assets. This will tend to strengthen the Australian dollar. The reasons that Australian dollar is very strong recently are shown above. But, what does it mean for consumers? To be simple, Australian dollar has more purchasing power. Consumers are able to afford more goods that import to Australia. Also, it has been much cheaper to travel abroad. In addition, the demand for Australia dollar is quite high, which is shown by the high interest rate. As a result, consumer can get higher return, if they put money in the bank. However, can we say strong Australia dollar is 100% beneficial to consumers? The answer is no. For the people, who buy oversea goods, it is good news. On the other side, it also has adverse effects on exporters who produce and sell overseas. Duo to high exchange rate with Australian dollar, the domestic goods become more expensive for foreigners. As a result, Australian products lost the competition in the globe trade. Unfortunately, it is not the only bad news. As travelling abroad becomes cheaper, even costs about as much as travelling locally, who would choose to travel in this country instead of enjoying their holiday overseas? So, the tourism in Australia will experience a recession in the near future. The same situation would happen to Australia universities that want to attract more oversea students. To conclude, strong Australian dollar brings upside as well as downside effects to consumers. However, what does it mean to investors? High level of financial inflows into Australia causes the ‘price’ of the Australian dollar appreciates. It has both advantages and disadvantages for the domestic and overseas investors in the short run and long run. In short run, a major implication of the appreciation of Australian dollar is the increase in the real purchasing power of the domestic investors. In other words, there in an improvement in terms of trade as imports become cheaper for the domestic investors. However, there will be a significant reduction in exports in Australia as the relatively price increases. It will therefore cause disequilibrium in the short run and higher export price resulting from the appreciation will direct affect the export industries in Australia and become less competitive in the global market. Consequently, it will lead to an increase in frictional unemployment in Australia. In the long run, the main effect of appreciation of Australian dollar is the structural change in the Australian economy. Due to the expensive exports in Australia, Australian export industry cannot compete under high exchange rate. It results in the reallocation of the labour and capital resources. Both domestic and overseas investors have better opportunities to earn a better return from the investment as the efficiency of the production rises and economic growth increases. The economy will reach the equilibrium point again in the long run so that results in decrease in unemployment rate and relatively higher investment return. The appreciation of the exchange rate has both positive and negative impact on investors. In short term, the economy will be worse off because of the uncompetitive high price of the exports. The foreign investors lose interest in making investment in Australia. However domestic investors will be better off as the relatively cheaper import price will give the domestic investors better returns. In long run, as the structural change in the economy has taken place, both domestic and foreign investors gain better return and the economic growth increases as well. In conclusion, Australian economy is competitive and stable after the 2008 global financial crisis, which remains a low unemployed rate. The value of AUD increased by the rising in commodity price in Australian domestic market .