Australia's place in the global economy - "Explain the reasons for our current exchange rate level. Evaluate its impact on the Australian Economy."

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 Australia’s place in the global economy


“Explain the reasons for our current exchange rate level. Evaluate its impact on the Australian Economy.”


The Reserve Bank of Australia (RBA) calculates the Trade Weight Index (TWI) measuring the movements of the Australian dollar relative to a “basket” of currencies of Australia’s major trading partners according to their importance in trade. Major currencies include:

  • Japanese Yen
  • US Dollar
  • European Euro
  • UK Pound

The Australian dollar has weakened against the Yen, the Greenback, and the Pound however the Euro has remained steady. The demotion of the Australian dollar, has also affected the Australian economy pessimistically.

The weakening of the dollar

Exchange rates of the One Australian Dollar

Source: RBA Bulletin Statistical March 2001

According to the table, there is a great significance in the weakening of the Australian Dollar relative to the US dollar, from 59.09 US cents on 1/4/00 to 48.9 US cents on 31/3/00. A decrease of 10.19 cents, 17% drop in the past year.

Causes to the Low $A-

There are four major reasons why the Australian Dollar is weak against other major currencies, they are:

  1. The first cause for the dramatic decrease in the Australian Dollar is the U.S Central Bank elevating interest rates too high (1999 – 2000), compared to Australia. This caused a reduction of foreign investment in Australia, and further investment into the U.S economy, causing money to flow out of the Australia’s circular flow (leakage). However at the same instance, money is flowing into the U.S economy (injection) increasing the amount of money flow and demand for $US therefore appreciating the U.S dollar. This caused the demand for the Australian dollar to decrease and the U.S dollar to increase. “Rates rose around the world in 1999 and 2000”. (Source: BRW: Growth party may be ending – Chris Richardson 12/1/01) mainly the US, then the rest of the world followed. Currently, the U.S is cutting back interest rates to regulate growth cutting back to 4.5%, and doing so Australia has followed at 5%. This will decrease foreign investment in Australia further, lower investment will then mean that the demand for our $A reduces and depreciates. “Recent U.S rate cuts will take time to reignite global growth.” (Source: BRW: Growth party may be ending – Chris Richardson 12/1/01).  Globalisation has affected the Australian dollar pessimistically; with US interest rates rising and in turn manipulated interest rates around the world.

  1. The second cause is the slow recovery by Australia experienced from the 1997 Asian Economic Crisis. “Australia had to maintain low interest rates, which was caused by Asian deflation… Rates rose around the world in 1999 and 2000, as did oil prices, and both slowed global growth.” (Source: Growth party may be ending - Chris Richardson BRW 12/1/01). With oil prices high, consumer confidence was diminishing. The interest rates in Asia were kept low, whereby Australia was forced to also keep interest rates low, due to Asia being one of Australia’s major trading partners. With Australia’s interest rates low and U.S interest rates high, there was discouragement of foreign investment in Australia. “Australia is more integrated with the world than ever and its clear that unfolding events… of global capitalism will have a greater influence than domestic factors and the RBA”(Source: Sydney Morning Herald: It’s the Americans, stupid – Ross Gittins 9/4/01). This shows that the exchange rate was not only affected by domestic economic growth but also international economic growth, reducing investment meant a reduction in growth and money flow.
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The Asian Economic Crisis affected the ASEAN countries, where “a collapse in one country spread to its trading partners” (Source: Year 12 Economics 2001 – Tim Riley). The spreading of the collapse was due to the process of globalisation, where Australia and Japan were highly integrated (dominating 19.7% of Australia’s export markets), causing Australia to also collapse. Japan was and still is Australia’s major trading partner, and with an economic slowdown it caused less trade, therefore resulting in less demand for the Australian dollar causing depreciation.

  1. The third reason for Australia’s low exchange rate is the GST and the ...

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