Essentially, currency exchange is the trading of one currency for another, and it usually takes place on the foreign exchange market (Forex Market). The market determines the value, also referred to as the exchange rate, of the majority of currencies. These rates keep fluctuating due to economic factors such as inflation, industrial production, and geopolitical events. The currency exchange rate is always quoted in pairs like the ESD/EUR, which represents the United States Dollar and the Euro. Every country use its fiscal policies to adopt an exchange rate regime that it considers optimal. An exchange rate regime is defined in Policonomics (N.d), as the “system that a country’s monetary authority, –generally the central bank –adopts to establish the exchange rate of its own currency against other currencies.” The exchange rate regime adopted hugely affects a country’s economy.
Due to the numerous factors affecting exchange rates, currencies of a nation tend to decline or increase in value. A decline in value of a country’s currency negatively affects the economy of that nation by creating instabilities in exchange rates. The level of currency instability dictates the rate at which one unit of a certain currency trades as much as it used to in another currency. Another concept used in currency exchange and trading is yearly average rates. The yearly average rate refers to the average exchange rate of a given currency for a given period. For instance, a 4-year average rate is the average for four years and is calculated by finding the sum of the exchange rate for the four years and then divide by 4.
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In this paper, the currency exchange for Australia and Japan will be discussed. The exchange rate between the Australian Dollar (AUD) and Japanese Yen (JPY) is 75.98 (XE Corporation, 2019). This indicates that 1 AUD equals JPY 75.98. The 5-year average rate for the two countries is 83.57 (OFX. 2019). The deviation between the 5-year average rate and the yearly rate is very small, and this indicates that the level of currency exchange between the two countries is very stable. This, in turn, indicates that the economies of the two countries are stable.
References
OFX. (2019). Yearly Average Rates. [Online]. Retrieved from: https://www.ofx.com/en-au/forex-news/historical-exchange-rates/yearly-average-rates/ . Accessed 21 st July 2019.
Policonomics. (N.d). Exchange rate regimes: Definition. [Online]. Retrieved from: https://policonomics.com/lp-exchange-rate-regimes-exchange-rate-regime/ . Accessed 21 st July 2019.
XE Corporation. (2019). XE Currency Converter. [Online]. Retrieved from: https://www.xe.com/currencyconverter/convert/?Amount=1&From=AUD&To=JPY . Accessed 21 st July 2019.
