The purpose of this report is to document and bring to surface the burdening issue of the effect of global economic conditions on Australia's exchange rate. The beginning of the report details what the exchange rate is and how it can be defined. Following that is a look at the effects of major events on the exchange rate and the government's reaction to these events. The report will also analyse what effects occur from a falling country for Australia and some possible strategies to help combat these.
WHAT ARE EXCHANGE RATES
The exchange rate can be defined as the price of a specific currency in terms of another currency. Exchanging currencies is essential for international transactions so countries can operate with their own currency. The method by which that price is determined depends on the particular exchange rate mechanism adopted in that country. Australia currently implements the 'floating exchange rate system' where the exchange rate is determined by the market forces of supply and demand.
This system means that the price of the Australian dollar is normally decided in the foreign exchange market by overseas currency buyers (demand) and local currency sellers (supply). This change to the floating system occurred in 1983 while prior to that year Australia utilized the 'fixed exchange rate system' where the exchange was officially set and controlled by the government.
Anybody of interest is able to buy and sell currencies and what is and because exchange rates are constantly fluctuating so it is possible to gain significant income from the transactions.
MAJOR EXTERNAL EVENTS THAT AFFECT THE EXCHANGE RATE
There are a considerable amount of major external events that impede upon our exchange rate. Because we use the floating exchange system our exchange rate all comes down to the supply and demand of our...