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The Australian Dollar (AUD)

   

Added on  2020-03-28

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Running head: IS THE AUSTRALIAN DOLLAR OVERVALUED?Is the Australian dollar overvalued?NameInstitution Affiliation

IS THE AUSTRALIAN DOLLAR OVERVALUED?2A. The past weeks have been good for the Australian dollar (AUD) as it has been the best performing currency globally which has put entities such as the Reserve Bank at ease. However, the same could be said for all economists as some of them feel that the levels the Australian dollar is trading at cannot be sustained. When put against the US dollar, the Australian dollar is up 6 percent and compared to the British pound sterling, Indonesian rupiah and the Chinese renminbi it is up 5 percent. Against the European Euro, the Australian dollar is up 4 percent and the Japanese yen 2 percent (Robin, 2017). According to a statement by the Reserve Bank of Australian (RBA) regarding interest rates, since 2013, the dollar has been losing its strength, and that has considerably helped the country’s economy as it transitions to the final stages of its mining investment boom. We would not have been possible to adjust as well as we have if the exchange rate is appreciated. However in response to this statement, a currency strategist working at the NAB feel that the RBA did not consider one important thing, the fact the Australian dollar has experienced a steady appreciationfrom September 2015. He states that it will be obvious to see that the Australian dollar has considerably risen if you study it using the trade-weighted basis. His statement does not support what Philip Lowe, governor of RBA said which indicated that it would be difficult to establish whether or not the exchange rate has gone up too high. There are other strategists who are in support of Mr. Low such as the chief current strategist at Westpac who states that the period in which you run a model determines the value of a current and he has found that the Australian dollar is somewhat undervalued. B. The Australian exchange rate is floating; what this means is that multiple factors might be causing its change repeatedly or that those factors are fixed to another currency, and although they still float, they move in synchronization with the currency to which they are fixed. It is

IS THE AUSTRALIAN DOLLAR OVERVALUED?3important for Australian investors to know the value of their home currency has it enables them to evaluate investments that are valued at the foreign dollar. For example, if an Australian investor wants to invest in the U.S, he will have to determine whether or not the AUD to US dollar exchange rate is profitable as a declining AUD could make could positively impact the foreign investment in terms of value. Similarly, an increasing AUD could decrease the value of the foreign investment. In the forex market, supply and demand are used to determine the value of the Australian dollar (Reserve Bank of Australia, 2017). The level of demand that is present in correlation to the supply of the AUD will determine the Australian dollar’s value when put against another currency such as the US dollar, the British pound sterling or the Chinese renminbi. For instance, if the demand for the AUD by the Chinese rises, the supply-demand relationship will cause the price of the AUD to increase when put against the Chinese renminbi (Fry and Voukelatos, 2010).The value of the Australian dollar is influenced by many factors. The country’s economy is at themercy of commodities including grains and metals. Data regarding mine output, the cost of metal, crop planting, yields and the weather is capable of increasing or decreasing the value of the Australian dollar. Further, how much strength the AUD has is determined by the commodity cycle, how exposed it is to Asia and the slightly countercyclical position the AUD has in relation to other important currencies such as the US dollar. For example in the article, the value of the Australian dollar might have risen due to a high demand of natural resources in India and China, but if the demand were to decrease, it would fall. In general, commodity prices that are high develop, it gives developed countries in Europe, North American as well as Japan the same burdens as the would have if they were in a recession

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