Essays on Exchange Rate Influence, Strategies Used by the Reserve Bank of Australia Case Study

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The paper "Exchange Rate Influence, Strategies Used by the Reserve Bank of Australia " is a perfect example of a finance and accounting case study.   The paper aims at presenting factors affecting the currency exchange rate. The exchange rate is the value given to a certain currency against that of another country. These factors are mainly dependant on the demand and supply of foreign currency. The paper also presents strategies used by the reserve bank of Australia to ensure that all is well in the currency market. Strength of the Economy This is measured in terms of how fast the economy is growing.

The fast-growing economies will attract a lot of trade that comes with foreign currency. The countries that highly import have low foreign currency because the country has to pay for these imports. There are countries which are net exporters and they gain a lot of foreign currency compared to the one they spend. The reason behind this is that the strength of the country’ s economy affects the supply and demand of forex. The countries that gain a lot of foreign currency tend to stabilize their local currencies because they spend less. Political and Psychological Factors These are the factors that relate to having a stable environment in the country.

This stability mainly comes from the political arena. The major currencies tend to fluctuate when there is instability in the country. The change of government is another factor that affects the foreign currency in or out of the country. This is related to the normal trends of the world economy where a slight change in the political instability of country that tends to affect the local currencies making it hard for such currencies to attract exchange from other countries.

The political instability mainly caused by wars makes it hard for a country to participate in the exchange of currency. Inflation Rates There is an allowance given by monetary authorities to cater for inflation level in the country. It is given in that when the level of inflation increases the exchange rates have to compensate for the loss realized from the inflation levels. It is also designed in a way to allow for deprecation of the exchange rates if they are overvalued.

The reason behind this is that the monetary authorities work to reduce inflation because it reduces a country’ s competitiveness and makes it hard for such a country to operate in the international market. The reason behind this is that inflation tends to weaken the domestic currency and makes it lose its demand as a foreign currency. This means that there is an influx in the domestic currency and a shortage in foreign currency. Capital Movements Foreign investment in a country comes in to inform of foreign currency.

This foreign currency is invested by buying equity shares in the country of investment. For example, during liberalisation in many countries, there was a lot of foreign currency coming into the liberalising countries. This help in strengthening the local currencies. The reason behind this is that the local currencies are converted into foreign currencies so as to help the investors to invest in the local market. This also has a negative impact on the local economy in case there is capital flight because this weakens the domestic economy.

The reason behind this is that the domestic currency will have to be exchanged so as to enable the country to participate in the international market. The only currencies that are not affected are the ones that cannot be converted in the capital account.

References

Reserve Bank of Australia (1999): Annual Report

Sarno, L and M P Taylor (2001): “Official intervention in the foreign exchange market: is it effective, and if so, how does it work?”, Journal of Economic Literature, vol 39(3), pp 839-68.

Scalia, A (2004): Is foreign exchange intervention effective? Some micro-analytical evidence from central Europe, mimeo.

Tapia, M and A Tokman (2004): “Effects of foreign exchange intervention under public information: the Chilean case”, Economia, LACEA, vol 4, Spring, pp 1-42.

Taylor, M P and H Allen (1992): “The use of technical analysis in the foreign market”,

Journal of International Money and Finance, 11(3), June, pp 304-14.

Truman, E M (2003): “The limits of exchange market intervention”, in C F Bergsten and J Williamson (eds), Dollar overvaluation and the world economy, Institute for International Economics, pp 247-65.

Woo, W T (1987): “Some evidence of speculative bubbles in the foreign exchange markets”,

Journal of Money, Credit and Banking, vol 19, no 4.

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