A Depreciation of a Country's Currency
A depreciation of a country's currency is an economic situation that requires serious analysis by economists to aid in the development of policies to avoid additional financial catastrophe. An review of the Australian economy reveals that the country underwent a long period of currency fall, necessitating a suitable response. According to Madura (2016), the decline in the value of the Australian dollar was caused by both external and internal reasons. In reality, a decline in the value of the currency of a given nation has adverse impacts on the economic activities that occur within the nation and other governments with which a country trades. Economists posit that the value of Aussie dollar started to decline in the year 2013 and significantly affected the economic progress of the nation (Hubbard, 2014). This essay explores the main factors behind the decline in the value of the Aussie dollar between 2013 and the end of 2015.
Fall In Demand for Iron Ores in China
Scholars argue that the decline in the value of Aussie dollar resulted from the deterioration in need for the commodities, which the Australians exported to the nations in Asia (Hambur et al., 2015). In reality, low demand for particular goods and services reduces the country’s competitive advantage in the international market. With time, the goods and services affected are likely to deteriorate in value forcing the producer to lower the prices or exit the market. In the long-run, a country experiences low profits, incur losses, or inflation, which weakens the value of the local currency.
Chief among the countries whose fall in demand for the Australian goods significantly affected the value of the Aussie dollar is China. In essence, Australia chiefly produces iron ores and exports it to the Chinese industry for the manufacturing processes. Consequently, traders need Aussie dollars to purchase the iron ore and ship it to the Chinese market hence a fall in demand for iron ore critically reduced the need for Aussie dollar in the exchange market (Gorajek & Rees, 2015). To compensate for the low prices of iron ores, Australian miners have engaged in extensive mining activities to increase the value of returns, thus adversely affecting the Australian natural reserves. Australian National University & Zhongguo (2016) postulates that the prices of the commodities from Australia will continue deteriorating in the Chinese economy thus further weaken the value of the Aussie dollar.
Interest Rates
Interest rates on investments, savings, and loans, generally influence the purchasing power of the consumers and investors. Therefore, investors are reluctant to spend when they anticipate lower interest rates on their investments. On the other hand, consumers will be discouraged from borrowing when the interest rates are high and not stable. The interest rate played a crucial role in the decline in the value of the Aussie dollar (IMI, 2016). In the business world, investors buy long term bonds with the expectation of a rise in the interest rates to benefit from their investments in real assets. However, in the case of Australia, the fall of the value of prices of commodities prompted the Central Bank to reduce the rates of interest attracted by the long term bonds. Hambur et al. (2015) argue that the central bank opted to cut the interest rates on the long term bonds to increase the money in circulation in the Australian market. However, the decrease in the rates of interest led to a fall in demand for investments in the Australian markets. Consequently, foreign investors opt for the US dollar, which has a relatively high value compared to the Aussie dollar.
Boom in North America's Housing Projects
The value of the Aussie dollar has also declined due to the stabilization in the North America real estate market (Brown, 2015). In essence, investors often expect to gain from the assets, which they purchase thus avoid countries where the value of commodities is consistently depreciating. Unfortunately, Australia was a victim of the constant depreciation in the value of goods consequently scaring away potential investors. According to Brown (2015), investors perceived Australia to be a risky region to invest in compared to the USA and other nations in Europe. The rate of investments in the Australian housing projects has critically declined thus reducing the desires for holding the Aussie dollars for the speculative motives (Megalogenis, 2017). As a result, the demand for the Aussie dollar critically weakened thereby reducing the currency's value in the global market. It is necessary that the Australian government initiates proper strategies for attracting foreign investors into the housing projects to increase the value of the Aussie dollar in the global markets.
Economists also attribute the fall in the value of the Aussie dollar to the rise of the US dollar index
(Lien, 2015). Stakeholders in the exchange market perceive the US dollar as the least volatile currency compared to the currencies of other nations in the world (Hsing, 2015). The changes in the values of assets in the global market have significant impacts on the currencies of the countries in the world. In particular, the rise in the US dollar index significantly affects the value of gold thereby inversely affecting the value of the Aussie dollar. According to the analysis by Megalogenis (2017), a rise in the US dollar index affects currencies from other nations, which also participate in the global marketing activities. Therefore, it is evident that the decline in the value of Aussie dollar resulted from the improvement in the US dollar index.
Conclusion
To conclude, the fall in the value of the Aussie dollar between early 2013 and the end of 2015 resulted from both internal and external economic activities. As discussed in this essay, the fall in demand for iron ores and high prices for commodities critically affected the value of the Aussie dollar against other currencies, rendering the Aussie dollar less valuable. Also crucial to the stability of Aussie dollar was the interest rates (low-interest rates), which negatively affected long term investments. Moreover, the boom in housing projects in the USA adversely affected the value of the Aussie dollar.
References
Australian National University, & Zhongguo guo ji jing ji jiao liu zhong xin. (2016). Partnership for Change: Australia-China joint economic report. Canberra: Acton, A.C.T. ANU Press.
Brown, B. (2015). A global monetary problem: Asset price inflation and Federal Reserve quantitative easing. New York, NY: Palgrave Macmillan.
Gorajek, A., & Rees, D. (2015). Lower Bulk Commodity Prices and Their Effect on Economic Activity. RBA Bulletin, September, 31-38. Retrieved on August 23, 2017 from https://www.rba.gov.au/publications/bulletin/2015/sep/pdf/bu-0915-4.pdf
Hambur, J., Cockerell, L., Potter, C., Smith, P., & Wright, M. (2015). Modeling the Australian Dollar (No. rdp2015-12). Retrieved on August 23, 2017 from https://www.rba.gov.au/publications/rdp/2015/pdf/rdp2015-12.pdf
Hsing, Y. (2015). Determinants of the AUD/USD Exchange Rate and Policy Implications. Asian Economic and Financial Review, 5(2), 326-332. Retrieved on August 23, 2017 from http://www.aessweb.com/pdf-files/aefr-2015-5(2)-326-332.pdf
Hubbard. G., Garnet, A., Lewis, P. O’Brien, A. (2014). Macroeconomics. Frenchs Forest, NSW, Australia: Pearson Education Australia.
International Monetary Institute, IMI. (2016). Internationalization of the RMB: Establishment and Development of RMB Offshore Markets. London: Routledge.
Lien, K. (2015). Day trading and swing trading the currency market: Technical and fundamental strategies to profit from market moves. Hoboken: Wiley.
Madura, J. (2016). International Financial Management. Stamford, CT: Cengage Learning Publishers
Megalogenis, G. (2017). Balancing act: Australia between recession and renewal. Richmond, BC, Canada: ReadHowYouWant.com Ltd.
