Economic Growth of Trading Partners †Free Samples to Students

Question: Discuss about the Economic Growth of Trading Partners. Answer: Introduction: The value of Australian dollar in the forex market is influenced by the forces of supply and demand. For example, if the demand for Australian dollar in American rise as depicted in graph one, the supply-demand relationship will make the Australian dollar to appreciate. If the demand falls, the value of Australian dollar will also decline. On the other hand, if the supply of Australian dollars increases as shown in graph two, then its value will decline. If inflation levels are low in Australian than in the United States, then the exports of Australia to the United States will be more competitive and there will be a rise in demand for the Australian dollar. As a result, the value of Australian dollar in comparison to U.S dollar will increase. Conversely, if inflation is high in Australia compared to the United States, then the value of Australian dollar will drop. If the interest rates in Australia are high than in the United States, more investors will be drawn to deposit money in Australia since they will get better earning for saving in Australian banks. Thus, the demand for Australian dollar will go up and cause an increase in its value. Equally, if the interest rates in Australia drop, then the value of Australian dollar will decline. If the current account deficit of Australia increases because it is spending more of Australian dollars on imports than its proceeds from exports, then the Australian dollar will depreciate. On the other hand, if Australias current account deficit declines due to high export earnings than import expenditure, then Australian dollar will appreciate. Other factors that cause fluctuations in Australian dollar include speculations, government debt, recession and political stability. When the price of Australian dollar rises or falls in comparison to the U.S dollar, the same trend is experienced among other major trading partners. Moreover, the value of Australian dollar in comparison to the U.S dollar has been rising and falling. This trend can be attributed to several factors. For example, the fall and rise in the price of Australias export commodities such as iron ore and ups and down in economic growth of the major trading partners. The article talks about the value of Australian dollar against the U.S dollar. According to this article, the Australian dollar has been appreciating whereas the U.S dollar has been on the decline. The appreciation of Australian dollar has been significantly caused by the increase in the price of Australias exports such as the iron ore. Although the Australian dollar has been increasing in value, the experts hold that the trend is not sustainable and it is expected to depreciate. These experts provide several reasons behind their argument. Foremost, the Federal Reserve is raising the interest rates while the reserve bank of Australia leaves the cost of borrowing low(Ismail, 2018). The high-interest rates in the United States will attract investors to save with the countrys banks to earn higher profits. As a result, the demand for U.S dollar will increase and lead to a rise in its value against the Australian dollar. The prices of Australias exports commodities such as iron ore are falling. This fall will increase the current account deficit and thus a decline in the strength of Australian dollar. Furthermore, China is a significant consumer of Australias commodities. Since the Chinese growth is decelerating, this impact will be felt in Australia as the export income to China will decline and hence a drop it Australi an dollar. Depreciation of Australian Dollar Australias low-interest rate in comparison to U.S interest rate and the decline in Australias exports earnings due to the falling prices of iron ore will result in the decline in demand for Australian dollars. This drop is depicted in graph three by the shift in demand curve from D1 to D0. As a result, the value of Australian dollar will decline from P1 to P0. The depreciation of Australian dollar in comparison to the U.S dollar will be detrimental to my firm that imports electrical machinery from the United States. This is because my company will use more Australian dollars to purchase U.S dollar in order to facilitate the purchase of goods. While Australian importers will lose, the Australian exporters will benefit from the depreciation of the countrys currency because their exports in the United States will cheap and hence they will sell more products. The reserve bank of Australian can deploy several approaches in order to bring AUD/USD exchange rate from US 72C per AUD to US 80C per AUD. For instance, the bank can increase the interest rates. Foremost, the high-interest rates will reduce the amount of money in circulation. Higher interest rates will also increase the demand for Australian dollar as foreign investors will save more with the countrys banks due to a better return. Increase in demand for Australian dollar will make it appreciate. Moreover, the bank can increase the reserve requirement for commercial banks and also buy government bonds and securities. These approaches will reduce the amount of money in the Australian economy and strengthen the currency. Although the above approaches will help to increase the value of Australian dollar there may cause some problems. High-interest rates, high reserve requirement and the purchase of government bonds and securities will deny the Australian cash needed for consumption and investments and hence slow economic growth. Appreciating the currency will also make Australians exports to the United States expensive and hence uncompetitive. Therefore, these are not reasonable economic policies. The government should focus on long-term supply-side policies such as boosting productivity and cutting the cost of production to make the countrys export industry competitive. Reference list Ismail, N., 2018. Australian dollar tipped to slide back to 70 US. [Online] Available at: https://www.smh.com.au/business/investments/australian-dollar-tipped-to-slide-back-to-70-us-cents-20180129-h0pp8v.html [Accessed 26 March 2018]. RESERVE BANK OF AUSTRALIA, 2018. Historical Data. [Online] Available at: https://www.rba.gov.au/statistics/historical-data.html#exchange-rates [Accessed 27 March 2018].