What drives the dol­lar value?

The Weekly Advertiser Horsham - - Back To School -

Im­porters and ex­porters might pay the clos­est at­ten­tion to the value of the Aussie dol­lar, but move­ments in the ex­change rate af­fect us all.

A ris­ing dol­lar makes it less costly to travel overseas and de­creases the lo­cal cost of im­ported goods.

On the down­side, it makes many of our ex­ports more ex­pen­sive for for­eign buy­ers, mak­ing life harder for farm­ers and other ex­porters.

The re­verse ap­plies in the case of a fall­ing dol­lar, but move­ments in ex­change rates don’t just in­flu­ence our liv­ing costs.

Most peo­ple with su­per­an­nu­a­tion will have a por­tion in­vested in overseas as­sets, and changes in cur­rency val­ues can also in­flu­ence the per­for­mance of re­tire­ment sav­ings – for bet­ter or worse.

So what are the main in­flu­ences on ex­change rates? Ul­ti­mately it comes down to sup­ply and de­mand, and that is de­ter­mined by a num­ber of things: 1. In­ter­est rates. Imag­ine an Amer­i­can in­vestor earn­ing one per­cent in­ter­est on her money. She looks across the Pa­cific and sees that she can earn two per­cent in Aus­tralia. Here’s an op­por­tu­nity to dou­ble her in­come. To do so she needs to buy Aus­tralian dol­lars, in­creas­ing de­mand for our cur­rency and thus in­creas­ing its value against the US dol­lar. Ex­change rates re­spond very quickly to both ac­tual changes in of­fi­cial in­ter­est rates, and to ex­pec­ta­tions of where in­ter­est rates in dif­fer­ent coun­tries are head­ing. 2. Com­mod­ity prices. From wheat and wool, to coal, iron ore and nat­u­ral gas, Aus­tralia pro­duces a wealth of com­modi­ties. When de­mand for the ma­te­ri­als we pro­duce is high, more money flows into Aus­tralia, cre­at­ing a flow-on de­mand for our dol­lar, push­ing it higher. 3. The econ­omy. If the econ­omy is do­ing well, or even a bit too well, the Re­serve Bank of Aus­tralia might raise in­ter­est rates to keep in­fla­tion un­der con­trol, which takes us back to item one. A strong econ­omy might also at­tract overseas in­vest­ment, cre­at­ing another driver of de­mand for the Aussie dol­lar. 4. Pol­i­tics. Elec­tions and ref­er­enda can cre­ate a cli­mate of eco­nomic un­cer­tainty that in­vestors, on the whole, don’t like. But it’s not that simple. Other things can in­flu­ence cur­rency val­ues, such as spec­u­la­tion or cen­tral bank in­ter­ven­tion.

There’s also a lot of in­ter­ac­tion be­tween the in­flu­ences on ex­change rates. For ex­am­ple, strong com­mod­ity prices might give a boost to the econ­omy, which leads to higher in­ter­est rates. Throw in some po­lit­i­cal un­cer­tainty, add a touch of spec­u­la­tion and things quickly be­come very com­pli­cated.

Armies of an­a­lysts are em­ployed to sift through mas­sive amounts of data in their at­tempts to fig­ure out where dif­fer­ent cur­ren­cies are headed.

How­ever, given all the com­plex­i­ties it is per­haps no sur­prise that they of­ten ar­rive at very dif­fer­ent con­clu­sions.

So will the Aussie dol­lar rise or fall? His­tory sug­gests flip­ping a coin might pro­vide as use­ful an an­swer as fol­low­ing the opin­ions of ‘ex­perts’.

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