The negative effects of an appreciation of the currency are as followed:
?In the long term it will decrease the competitiveness of Australian producers in the tradable goods sector. Australia?s goods and services will become less price competitive and therefore less attractive to overseas buyers. The CAD would increase if this were to occur.
?An appreciation could lead to higher levels of capital outflow from Australia. This is because Australian assets become more expensive and less attractive relative to goods and services produced overseas. This would decrease foreign equity investment in Australia.
?It could lead to higher unemployment rates as those industries that export restructure in an attempt to remain internationally competitive.
?A dramatic appreciation might lead to a RBA indirect intervention to support the exchange rate by lowering interest rates to reduce the demand for Australian dollars. This could lead to high levels of economic growth and investment, causing domestic inflation levels to rise.
RECENT TRENDS IN THE AUSTRALIAN DOLLARIn recent months, the Australian dollar has generally been making an upward climb. The trend seems set to continue. Four months ago, the AUD was trading at .51715 (18/2/2002). Today it is trading at .54795. The exchange rate is currently seen to be relatively undervalued due to the strength of the American dollar. The Sydney Morning Herald?s Economic Editor, Ross Gittins, says that the American dollar is vastly overvalued and the Australian dollar undervalued. He says this is an imbalance and that ?the thing about imbalances is that they?re unsustainable: eventually they have to be, and will be, corrected ? one way or the other.? It could be for this reason that the Australian dollar is starting to gain momentum and increase in value against all other major currencies, particularly the .
Other reasons for the appreciation of the Australian dollar include the recent economic figures posted by the government showing Australia to be in a strong economic position, the recent budget deficit and the anticipated rise of interest rates.
Bibliography:Shaw Stockbroking ?Egoli?: http://www.egoli.com.auReserve Bank of Australia: http://www.rba.gov.auAustralian Foreign Exchange Market: http://www.ozforex.com.au/Australian Bureau of Statistics: http://www.abs.gov.auAustralian Economic Data: http://www.economagic.com/aus.htmAustralian Treasury Website: http://www.treasury.gov.au/The Sydney Morning Herald Newspaper
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