There is general consensus that the principal reason behind the strong Aussie dollar is that Australia currently fits the needs of one of the fastest growing regions in the world — Asia. As Asian countries are passing through a commodity intensive stage of economic development, they have helped fuel a mining boom in Australia.
As the mining and export industry thrives, the value of the Australian dollar rises. Strong demand — particularly from China — is driving this process. As the European debt crisis continues the Euro remains unstable, further weakening it against all major currencies, including the Australian dollar.
A lower value of the Australian dollar then decreases the price of Australian goods and services for foreigners, who now require less of their own currency to purchase Australian goods and services. PPP states that this process of adjustment should occur until Australian goods and services are no longer expensive relative to those in other economies.
The Big Mac index relates the exchange rate in many countries to the relative price of a Big Mac hamburger, a good that is available almost everywhere in the world. Over shorter periods of time, or on a day-to-day basis, the value of the Australian dollar can move closely with a variety of factors, including changes in risk sentiment and speculation. For example, if investors feel that the outlook for economic growth is more positive than before, they will be prepared to take on more risk.
Often this coincides with an increase in the demand for Australian dollars. Investors in other financial markets are observed to respond in similar ways to changes in risk sentiment, such as in global equity markets.
This means that movements in the Australian dollar exchange rate have broadly followed those observed in global equity markets at different points in time. Typically, the Australian dollar appreciates when prices in global equity markets increase, and depreciates when prices in equity markets decline.
Investors also may speculate about future movements in the exchange rate for a range of reasons, and buy and sell Australian dollars to make a profit, which affects the exchange rate. The RBA's approach to foreign exchange market intervention has evolved over the past 30 years as the Australian foreign exchange market has matured.
Despite having a floating exchange rate, the RBA can still intervene in the foreign exchange market. It may decide to do so if the market becomes disorderly or dysfunctional, or if the Australian dollar becomes grossly misaligned from a value implied by Australia's economic fundamentals.
Intervention by the RBA has become less frequent over time and more targeted. The RBA last intervened in the foreign exchange market in during the global financial crisis, when it bought Australian dollars. This was in response to evidence that large, rapid depreciations in the Australian dollar had led to excessive volatility in the exchange rate.
A one-sided market means that the number of sellers far exceeds buyers for Australian dollars, or vice versa. In this environment, the Australian dollar can become volatile; that is, it can appreciate or depreciate by a large amount very quickly.
For example, a sharp increase in the supply of Australian dollars onto the foreign exchange market may result from sellers of Australian dollars having difficulty finding buyers at an agreed price. In this instance, the Australian dollar can depreciate by a large amount in a short time. But it's a crime no-one talks about. Third COP26 draft ensures rich nations deliver climate promises. Sara Duterte is running for vice-president of the Philippines, and she may have to take her father on.
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The Australian Dollar had a fixed exchange rate until when the Australian Labor government floated the currency. As Bretton Woods began to break down, the value of the Australian Dollar was converted to a traditional peg against a floating US Dollar.
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