Exchange rate notes.

Exchange rate notes. - Exchange rates Definiton: The price...

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Exchange rates Definiton: The price of one currency in terms of another economy’s currency, which facilitate economic transactions b/w individuals, firms, govt’s in different economies Currency conversion occurs in the foreign exchange market (forex market) Australia’s floating exchange rate system Dec 83, Aus switched from a managed flexible peg to a floating exchange rate system-one of most important structural changes aus has implemented, opened up economy to global financial flows Under the floating system, the exchange rate is determined by the interaction of the market forces of D and S not govt, which establish an equilibrium price for the $A in terms of another country’s currency. Demand for $A Represented by all those people who wish to buy $A, demand is affected by: Size of financial flows into aus from foreign investors wanting to invest in aus and need to convert their currency into $A. The level of capital inflow is affected by aus I/R relative to o/s interest rates & the level of confidence in aus economy (higher I/R to o/s=encouraged capital inflow=increased D $A) Expectations of future appreciation of $A>increase D $A by speculators wanting to make a profit on short term money movements, thus contributing to the expected appreciation Demand for aus X (foreigners who M aus X need to convert their currency into $A to pay aus Xers) Historically, changes in commodity $P and TOT have had immediate effect on the dollar, rise in $P commodity & improvement in TOT expected>improvement in CAD. Finanical markets respond by increasing the value of the dollar D for aus X influenced by int’l competitiveness of domestic Xers and aus inflation rate relative to o/s countries. If domestic firms are competitive o/s & inflation is low, $P X will generally be cheaper & more attractive to buyers Changes in global economic conditions-D for aus commodity X is highly dependant on the levels of Y of aus trading partners (when global economy is on an upturn, D and $P of X rise) Supply of $A Represented by all those people who wish to sell $A. Supply is determined by: Level of financial flows out of Aus- will be determined by domestic I/R relative to o/s & int’l confidence in aus & other economies. Low I/R & deteriorated confidence in aus economy> increased financial outflow=increased S $A
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This note was uploaded on 02/10/2012 for the course ECON 1002 taught by Professor Markmelatos during the Three '10 term at University of Sydney.

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Exchange rate notes. - Exchange rates Definiton: The price...

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