The Australian dollar comprises one of the commonly traded currencies in the world foreign exchange market. The currency is ranked fifth in the world. On the other hand, the American currency is the most common standard currency used in many international transactions. The stability of exchange rates in Australia impacts the direction and quantum of commerce and foreign trade.
The Australian dollar comprises one of the commonly traded currencies across the world. Exchange rates in Australia significantly impact financial flows and trade between Australia and the United States. The currency derives value from an interaction of many macroeconomic factors such as interest rates, rates of inflation, imports, and exports (Frenkel, 2019). There are several major events that impacted the exchange rate between the United States dollar and the Australian dollar, such as the Asian financial crisis. This paper aims to discuss macroeconomic factors such as inflation rates, interest rates, imports, and exports and how they impact the exchange rates between the AUD and the USD.
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The first macroeconomic variable that impacts the rate of exchange between the AUD and the United States $ is interest rates. There is a close interconnection between interest rates, rate of inflation, and exchange rates. An increase in the rates of interest causes the Australian dollar to appreciate. As the rates of interest hike, higher interest rates apply to a lender, which in turn attracts increased foreign capital (Engel, 2016). This results in a rise in Australian dollar value, which strengthens the AUD relative to the USD. This triggers a rise in the exchange rate of the Australian dollar against the United States dollar.
On the other hand, a reduction in interest rates depreciates the value of Australian currency, which consequently reduces the exchange rates of the Australian dollar against the American dollar. The interest rates in Australia tend to increase more compared to other countries in the world. The rising interest rates attract foreign capital. The value of the Australian dollar increases due to a significant rise in demand as investors look for more capital to invest.
The second macroeconomic variable is the rate of inflation. Inflation refers to a significant and consistent rise in general prices of goods and services. The rates of inflation affect the value of a country's currency. In Australia, high rates of inflation reduce the value of the Australian dollar relative to the United States dollar. On the other hand, a low rate of inflation in Australia indicates a higher value of the Australian dollar relative to the United States dollar. An increase in the Australian dollar value indicates a significant rise in purchasing power (Lee & Kim, 2019). A high rate of inflation results in a lower value of the Australian dollar, triggering a low exchange rate, while low inflation indicated a higher value of Australian currency and a high exchange rate. The rate of inflation has a direct impact on the rate of economic development in a country. The high rate of inflation is triggered by circumstances such as government debts. Countries with a high public debt suffer high rates of inflation due to limitations in foreign capital access.
The other macroeconomic variable that impacts the exchange rate between the Australian dollar and the United States dollar is the rates of imports. Australia exports many goods to other countries in the world. It also receives goods from other parts of the world as imports. Australia suffers a decline in the value of Australian currency due to a significant rise in the volume of imports relative to the volume and value of exports (Engel, 2016). When the value of imports exceeds the value of exports, the resulting is a trade deficit that undermines the value of Australian currency, resulting in a decline in the exchange rate. The weakening of the Australian dollar due to trade deficits tends to stimulate exports while making imports more expensive. On the other hand, a high value of Australian currency hampers exports while making imports relatively cheaper.
The relationship between Australian imports and exports and the exchange rate between the Australian dollar and the United States dollar is complicated. There exists a loop between the value of the currency and the exchange rates. Trade deficit or surplus is determined by the exchange rates between the Australian currency and the Australian dollar. On the other hand, the exchange rate is determined by the deficit or surplus in trade. A weak Australian domestic currency enhances exports while limiting imports by increasing the value of imports. The rate of interest and inflation has an impact on exports and imports by influencing the exchange rates (Lee & Kim, 2019). The high interest rate of inflation attracts high interest rates, and this impacts the value of Australian currency. According to the traditional theory of currency, a country with a high currency value attracts high inflation and, consequently, high interest rates, which, in turn, depreciates the domestic currency value.
For several years, the Australian currency has remained relatively stable against the United States dollar. The exchange rate between the Australian dollar and the United States dollar varies depending on the various macroeconomic variables discussed above. Macroeconomic variables such as interest rates and rates of inflation vary depending on various factors, both domestic and global. The Australian currency has suffered depreciation against the American dollar during the major global crisis, which impacts the rate of inflation and affects other economic variables such as employment.
References
Engel, C. (2016). Exchange rates, interest rates, and the risk premium. American Economic Review , 106 (2), 436-74.
Frenkel, J. A. (Ed.). (2019). Exchange rates and international macroeconomics . University of Chicago Press.
Lee, S., & Kim, Y. M. (2019). Inflation expectation, monetary policy credibility, and exchange rates. Finance Research Letters , 31 .
