What factors may explain a depreciation of the Australian Dollar?.
How may this depreciation influence the Australian economy?.
A depreciation of the A$ can be caused by a wide variety of factors. But the main factor causing depreciation is low demand for Australian Goods and Services from overseas markets. This can result from several reasons. It could occur as a result of a world economic recession, this is that there a re generally low levels of production growth, employment growth, income and expenditure in overseas countries meaning that fewer people can afford to purchase Australian exports.
Domestic Inflation can also affect Australia's exports if the inflation level is high, especially if it higher than our major overseas trading partners, Australia's export prices will be increased and the competitiveness will be greatly reduced.
Domestic Inflation can also mean that domestic goods lose their competitiveness with imported Goods and Services. This will lead to an increase in imports and further affect the exchange rate.
An increase in the demand for imports can also have an affect on depreciation of the A$. If domestic producers cant sufficiently satisfy the wants of the domestic market, Imports will increase and the A$ will depreciate.
Levels of Capital Inflow and Capital Outflow also have large effect on the value of the A$ and can lead to its depreciation.
If there is low confidence in Australia's economy and the expected returns on investment are also low, this could lead to reduced Capital Inflow into Australia. Confidence can be affected by factors like Inflation rates, economic growth, production levels, International credit ratings and the size of our external debt.
Also if there is low aggregate demand, low production levels, high unemployment, high Inflation or low economic growth in Australia, there is a tendency for Australian investors to invest else where, where economic conditions are better.