Exchange Rate Help! (1 Viewer)

[SGSII]

Hi Guys
I'm in the process of writing an exchange rate and essay and I have a few questions to ask:
* If domestic interest rates are high does that mean low or high exchange rate? And why is that?
* How do global commodity prices affect exchange rates?
Please help me
Any help is good help!
Thanks

 

[bhsrepresent]

Hi Guys
I'm in the process of writing an exchange rate and essay and I have a few questions to ask:
* If domestic interest rates are high does that mean low or high exchange rate? And why is that?
* How do global commodity prices affect exchange rates?
Please help me
Any help is good help!
Thanks

1. A higher domestic interest rate makes it more attractive for foreign investors to store their funds in domestic banks (because a higher IR means a higher return on savings) - in order to do so they must exchange their currency for $A, leadng to an increase in demand for $A, and thus an appreciation, SO:

Rise in domestic IR: Higher dollar
Fall in domestic IR: Lower dollar

2. This will depend largely on if the economy of discusson trades heavily in commodites - in Australia's case, it will impact the ER significantly:

A rise in global commodity prices is generally associated with an increase in demand for commodities (largely due to rapid industrialisation of emerging economies), and an increase in demand for commodities means that there will be an increase in demand for $A, as nations need to buy $A in order to purchase commodiies, SO:

Rising global commodity prices signify:An increase in demand for $A, and thus, a rise in the ER [appreciation]
Falling global commodity prices signify: A decreae in demand for $A, and thus, a fall in the ER [depreciation]

 

[SGSII]

1. A higher domestic interest rate makes it more attractive for foreign investors to store their funds in domestic banks (because a higher IR means a higher return on savings) - in order to do so they must exchange their currency for $A, leadng to an increase in demand for $A, and thus an appreciation, SO:

Rise in domestic IR: Higher dollar
Fall in domestic IR: Lower dollar

2. This will depend largely on if the economy of discusson trades heavily in commodites - in Australia's case, it will impact the ER significantly:

A rise in global commodity prices is generally associated with an increase in demand for commodities (largely due to rapid industrialisation of emerging economies), and an increase in demand for commodities means that there will be an increase in demand for $A, as nations need to buy $A in order to purchase commodiies, SO:

Rising global commodity prices signify:An increase in demand for $A, and thus, a rise in the ER [appreciation]
Falling global commodity prices signify: A decreae in demand for $A, and thus, a fall in the ER [depreciation]

Thank you so much!!

 

[SGSII]

How about in the case of high domestic inflation rates?

 

[bhsrepresent]

How about in the case of high domestic inflation rates?

a higher domestic inflation rate will mean that domestic exports are more expensive and thus less internationally competitive. for ths reason, demand for the $A will fall, and the ER will depreciate - think of it this way, factors that makes aussie goods more expensive will cause the ER to fall