EXCHANGE RATE

Impact of Appreciation in Exchange Rate

Impact of Appreciation in Exchange Rate

Introduction

In today's world, the exchange rate reflects the current status of the country's economy. The exchange rate is the result of various economic factors of the country such as investments inflows, outflows, availability of natural resources, law and order situation, inflation rate, interest rate and the available infrastructure. These factors have potential to attract the foreign investors which is a favourable sign for the exchange rate. If a country is witnessing higher interest rate then the exchange rate will be negatively affected because the cost of capital will higher for the investors which make the investors reluctant in investing in the country. It is a fact that the mankind prefer to live and carry on their investing and operating activities where mankind foresee long term safe law and order situation. The infrastructure plays a crucial role in attracting investors. The infrastructure includes buildings, availability of utilities such as gas, electricity and water, roads and etc. The infrastructure attracts the investors because if these facilities are not available then the investors has to build required infrastructure (roads, availability of utilities) to carry out the required operation. This increases the cost of doing business for the investors and minimizes the returns. Therefore, the lack of infrastructure will lead to make the investors reluctant in investing in that country which is a very negative sign for the exchange rate of the country.

The company with massive investments used to undertake different types of operations globally. There are two main motives behind the corporate that carry on operation in other country which are exploitation of new markets and access to natural resources of any particular country. It can be inferred that the country with higher level or abundant natural resources can attract the investors more successfully. The company's bring heavy investments to the host country for extracting the natural resources and transforming these resources into final product. This creates employment opportunities and appreciates the exchange rate.

Discussion

Causes of Appreciation in Exchange Rate

In the early 2000, the country Australia witnessed decline in its currency value which was approximately below US50c, but the real exchange rate appreciated quickly and the economist was speculating that the underlying currency might again achieve parity with the US dollar as it did in the mid-1970s. The country Australia was on the edge of the global financial crisis during July 2008 and witnessed sever surge in dollar to US98c. However, Australia was soon caught up in the midst of a collapsing world economy, and in March 2009 the exchange rate plummeted to US64c. The dollar made a comparatively rapid recovery and in seven months it had risen again to US90c unpredictably (Financial Times Newspaper, pp. 16, 23/08/11).

The main cause behind the massive appreciation in the Australian currency is the trade and financial inflows. The country witnessed massive financial inflows due to its natural resources and minerals. Australia is the country which has the competitive advantage in the mining ...