Topic > Australian Dollar Analysis - 1675

Question 1 Since December 2010, the Australian dollar has generally been above parity with the USD. To make one currency strong, another must be weaker. One of the main factors that determine the value of a currency is what and how much a country sells to other countries. Trade is the determining factor in whether a currency is strong or weak (SSFS Australia). The Reserve Bank of Australia (RBA) has calculated a trade-weighted index for the Australian dollar. This means that the RBA compared the Australian dollar to the currencies of its major trading partners, weighted by trade importance. As seen from Table 1, it shows that the trade-weighted index and the US/Australian dollar exchange rate closely match. This table shows that the strength of the Australian dollar is large compared to the currencies of other major trading partners and not just compared to the US dollar. Table 1 With strong demand for mineral resources such as iron ore and coal from China and Asia, this creates both sales revenues and capital inflows for further investment in the mineral resources sector. With this flow of money, this in turn drives the Australian dollar higher. Another factor that has led the Australian dollar to strengthen against the US dollar is the economy's boost in the mining sector, which makes Australia an attractive destination for potential and current international investors, especially when compared to troubled countries. economies such as Europe and the United States. Strong economic strength means the RBA must keep inflation under control to ensure a stable economy without overheating or creating asset bubbles and destabilizing outcomes. To ensure that inflation does not fall..... . half of the card......occur. As mentioned earlier in this assignment, interest rates and inflation have an inverse relationship with each other. This can be represented by the fact that people tend to save less in an inflation-stricken economy due to the high price of services and goods. With inflation also comes the demand for salary increases. This is often caused by organized groups of employees, such as unions. With increased demand for pay, this will increase spending which in turn will further increase the price. This is called a wage-price spiral and will continue to go on in a vicious circle. With inflation comes the standard of living. To maintain the same standard of living, you have to pay more. Due to rising prices, you have to shell out more money for the same goods and services you used before inflation. Financial planning also becomes difficult as the value of money decreases as it increases