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Answer to Question #31733 in Macroeconomics for dibin

Question #31733
10. Why has the Australian dollar soared over the last five years? What are the domestic economic implications for producers and for consumers? (3 marks)
Expert's answer
In the two decades that followed, its highest value relative to the US dollar was $0.881 in December 1988. The lowest ever value of the Australian dollar after it was floated was 47.75 US cents in April 2001. It returned to above 96 US cents in June 2008, and reached 98.49 later that year. Although the value of the Australian dollar fell significantly from this high towards the end of 2008, it gradually recovered in 2009 to 94 US cents.

On 15 October 2010, the Australian dollar reached parity with the US dollar for the first time since becoming a freely traded currency, trading above US$1 for a few seconds. The currency then traded above parity for a sustained period of several days in November, and fluctuated around that mark into 2011. On 27 July 2011 the Australian Dollar hit a record high since the floating of the dollar. It traded at a $1.1080 against the US Dollar. Some have even suggested the dollar could rise as high as 1.70 USD by 2014.

Some commentators claim that the value of the dollar in 2011 is related to Europe's sovereign debt crisis, and Australia's strong ties with material importers in Asia and in particular China.

Economists posit that commodity prices are the dominant driver of the Australian dollar, and this means changes in exchange rates of the Australian dollar occur in ways opposite to many other currencies. For decades, Australia's balance of trade has depended primarily upon commodity exports such as minerals and agricultural products. This means the relative value of the dollar varies significantly during the business cycle, rallying during global booms as Australia exports raw materials, and falling when mineral prices slump or when domestic spending overshadows the export earnings outlook. This movement is in the opposite direction to reserve currencies, which tend to be stronger during market slumps as traders move value from falling stocks into cash.

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