How changes in exchange rates affect the Australian Economy?

  • ERemit
  • 21 November, 2020
  • 2 minutes read
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Exchange rates can be defined as the value of one currency against a foreign currency.

In terms of international money transfers, exchange rates decide the amount of money the recipient will receive at the other end in return for the money sent.

An expat settled in Australia sending money to India (his/her home country) must have a clear idea of the exchange rates so as to make sure that the value of Indian Rupees received at the other end is positively valuable to the Australian Dollars sent.

Most of the countries, including Australia, have a floating exchange rate that changes the value of currency from time to time.

Here is an article that tells how these changes in exchange rates would affect the Australian economy.

Import & Export of Goods

Currency depreciation is when there is a decrease in the value of the Australian dollar in comparison to the other currencies. The impact of currency depreciation goes two-fold:

1- Direct Effect:

The decrease in the value of the Australian dollar will have a direct effect on the prices of goods and services produced within the country. Currency depreciation makes Australian goods and services cheaper than foreign products.

2- Indirect Effect:

As Australian goods and services become cheaper, there would be an increased foreign demand to export goods and services overseas. At the same time, people living in Australia would find imported foreign goods too expensive and will conveniently switch to Australian goods. With the rising domestic and foreign demand, manufacturers hire more workers, employing more people and thereby decreasing the unemployment rate. The increase in exports and decrease in imports also enhances the national income of Australia.

Currency appreciation is when there is an increase in the value of the Australian dollar in comparison to other currencies and the direct and indirect effects discussed above happens in the exact opposite way.

Inflation

Inflations occur when the currency depreciates and the price of imported goods and services increase.

So the scenario is, you spent more money, yet stuck with fewer products in hand.

Higher inflation will in-turn disintegrates the value and power of currencies. Thus, people wish to invest in countries with low inflation.

Since Australia has low inflation, investors feel confident to invest in Australia as they could accumulate more money in the end.

Interest Rates

Change in exchange rates has a direct impact on interest rates, paid to banks upon taking loans and paid by banks for deposits.

The changes in cash rates in Australia, and any country for that matter, has an impact on the interest rates.

The higher the exchange rates are, it attracts foreign investors who are looking for greater returns for their deposits.

This frequently fluctuating exchange rates also have a major impact on overseas money transfer in Australia.

After all, it determines the actual amount your beneficiary come out at the other end.

These money transfers in the remittance industry and foreign direct investments, in turn, affect the Australian economy in big-times.