Currency Fluctuation Management and its

Importance
Year 12 Economics

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Contents
Introduction...........................................................................................................................................3
Findings.................................................................................................................................................4
Discussion of Findings............................................................................................................................5
Recommendations.................................................................................................................................7
Conclusion.............................................................................................................................................8
Reference List........................................................................................................................................9

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Introduction
Currency is used by everyone around the globe, the potential that money holds is limitless
and can be used to buy almost anything. The value of currencies fluctuate for many reasons
affected by almost anything in a community. The fluctuation of economy’s currency’s is
monitored by government and external parties to predict movement in the value of
currency and determine whether or not intervention and management is required. Dramatic
increases and decreases of a countries currency can jeopardise the economy and its success.
Currency management is potentially serious issue in international economics as it
substantially can affect an economy’s success or failure, this is why management must be a
high priority for all countries. Economies currencies are pivotal in trade overseas and even
domestic activity, this in turn determines the success of a nation’s economy, making the
importance of managing currency fluctuation vital.

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Findings
Floating exchange rates have always been prone to fluctuate due to economic factors, this
idea of managing and monitoring movement is also not a newly adopted idea. A floating
exchange rate is a system where the currency price is solely set by the market forces of
supply and demand compared to other currencies (Investopedia, n.d). Although this rate is
determined by market forces, central banks (like the Reserve Bank of Australia) intervene by
buying or selling their local currency to adjust the exchange rate, this can be done to
stabilize volatile markets or stimulate stalling rates (Investopedia, n.d).

In the last 26 years, Australia has had continuous Graph A

economic growth, this is the longest ever period

of consistent growth for an economy (Tang,
2017). A large reason for this success is the
mining boom experienced by Australia in recent
decades. Beginning in around 2003, the
international price for commodities began to
dramatically rise, iron ore going from around $20
a tonne to peaking at $170 a tonne, this is shown
Graph B

to the right in Graph A (Phillips, 2016). As for the

mining booms effect of the Australian dollar and
its exchange rate, the dollar spiked drastically and
weakened the effect of the Global Financial Crisis
allowing Australia’s economy to bounce back with
further rapid growth (Graph B).

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Subsequently, Australia saw all areas of the domestic
economy effected by mining, industries such as Graph C

construction, electricity and property/ business

services all experienced rapid growth in output
whereas agriculture and manufacturing output all fell
(Tulip, 2014). Overall, real household disposable
income rose from around 2% to almost 12% from 2003
to 2010, this in turn led to the employment rate growing steadily as business’s in the
previously mentioned industries which were positively affected experienced great success
(Tulip, 2014). Australia’s macroeconomic success has been heavily reliant on mineral
products and even now after the mining boom, around 50% of Australia’s exports are still
minerals (Atlas, 2017).

In recent years the Australian dollar has drastically fallen in value, 2011 saw the dollar reach
its highest ever point valued at 1.10 US dollars, it has since dropped to being worth only 0.8
US dollars (Trading Economics 2017). Australia’s reliance in the mining industry has seen
their growth become sluggish as the mining industry also slumps. Graph C shows the
exchange rate movement of the AUD to USD and the fall in international competitiveness in
recent years.

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Discussion of Findings
Appreciation and depreciation of the value of currency should not be seen as a good or bad
thing, as they both positively and negatively affect various aspects of an economy, this
contradicts the common thought that a stronger dollar is better for an economy. Whether
the nature of the currency appreciation/ depreciation is good or bad is heavily dependent
on the nation’s economy itself and its industry movements. If an economy has low capacity
utilization and high unemployment like Zimbabwe, a rising dollar would mostly be negative,
whereas a falling value would be quite good. In a broad macro-economic perspective, a
falling value benefits the international relationships of a country whereas the rising dollar
supports domestic trade. Currency values are guaranteed to fluctuate from simple supply
and demand which is then tied into factors like the inflation rate and monetary policy, also
effecting currency’s supply and demand is the political and economic conditions of a nation.
Although supply and demand determines movements of the Australian dollar valuation, the
exchange rate can be and is managed by the actions of the Reserve Bank of Australia (RBA).
The RBA has implemented monetary policies since early 1990’s, the policy involves setting
the interest rate on overnight loans in the market in order to stimulate economic activity or
control it if the economy is at risk of too much inflation. The bank must aim to maintain
price stability, full employment and the economic prosperity and welfare of the Australian
people (RBA, n.a). In order to achieve these targets, the bank aims to keep consumer price
inflation in the economy around 2-3 per cent (RBA, n.a). Because of monetary policy, the
Reserve Bank of Australia is crucial in managing currency fluctuations for Australia, Graph C
on the previous page shows that the Australia dollar has fallen significantly in the last 6
years which means that the RBA must implement a more appropriate policy.

As shown and discussed in the findings section of this report, Australia’s 26year period of
consistent economic growth was heavily reliant on the exporting of minerals and more
specifically the mining boom. This rising dollar effected the Australian economy in many
ways, some positive and some negative. During the time of the mining boom, households
where heavily effected as average income and living standards grew, domestically their
purchasing power fell however this saw many Australians look overseas for products
because of the stronger AUD (Tulip, 2014). Overall, households were positively affected,

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however in recent years the lack of economic growth has shown signs of real household
income falling again (Tulip, 2014). With the percentage of disposable household income
rising from the mining boom, most domestic business’s experienced increased sales, in turn
leading to a lower unemployment rate, one of the Monetary policy targets (Tulip, 2014).
One industry that majorly suffered during this time of domestic success was the agriculture
industry. However, because the Australian economy did not export much agriculture and
more so only produced for the domestic communities, the decrease in agriculture success
did not majorly effect the exchange rate. To control the Australian currency in today’s age,
the economy mustn’t be so reliant on mineral exports as that industry is slacking and if the
demand here dramatically fell, the AUD value would be at risk to a major fall. Government
spending and tariff’s in certain industries should stimulate growth in other areas to in turn
improve the economy’s prosperity.

Therefor there is no specific cause of currency fluctuations, it is more so the indicators on

demand and supply that will in turn effect the currency value. A large determinant of the
currency value is the rate of inflation. In Australia there is a floating exchange rate, purely
determined by market supply and demand. However the Reserve Bank of Australia (RBA)
still can affect his rate by changing interest rates to in turn affect inflation. The RBA aim to
keep the inflation rate at around 4%, however if inflation was to be too high, the RBA may
counteract this by raising the interest rate within Australia. This leads to encourage people
to stop spending and save their money, it also stimulates foreign investment into Australia
and increases the amount of capital entering the Australian economy, which then leads to
more demand for the country’s dollar. The RBA and Government’s effect on the Australian
dollar is huge, leading to the consistently growing economy Australia has had for almost 3
decades. An unstable dollar reduces Australia’s international competitiveness, a key target
area for the government and the RBA.

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Recommendations
The management of currency fluctuations for any country is vital to ensure a growing
economy. Without proper management, the Australian dollar would lose competitiveness
internationally or domestically become relatively inactive, which would then lead to
underutilisation of assets and work. Australias’ consistent dollar has proven to be a reason
for record breaking economic success, however, recent years have seen Australia slightly
lose control over the dollar’s fluctuations. The export reliance on the mining industry risks
leaving the economy vulnerable to external shocks like dramatic changes in demand or
supply of minerals.

In order to secure economic safety and prosperity, the current situation of Australia’s
reliance on the mining industry must be looked over and changed. Through changing
interest rates, tax rates both personal and business and focusing government spending in
certain areas, the Australian economy can move away from relying on the mining industry
that has slowed down in the last half-decade. Shown in Graph C in findings, the last two
years has seen the Australian dollar grow 0.1% in comparison to the US dollar, this shows
promising signs of the economic growth and international competitiveness growing.
Australia must continue this and properly manage the currency fluctuation of the Australian
Dollar.

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Conclusion
Currency fluctuations have been present ever since the introduction of international
currency exchange rates. Many countries have struggled to maintain continuous healthy
growth in the valuation of their currency, however Australia has been one of the few
economies to do this well. The importance of maintaining the current management levels of
the Australian dollar should be a high priority for the Australian government. Miss-
management of the Australian dollar will see the economy suffer and lose international
competitiveness, Australia already has a good foundation and record of consistent growth,
this must be maintained to see success.

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[Accessed 13 Sep. 2017].

Beattie, A. (2017). The History Of Money: From Barter To Banknotes. [online] Investopedia. Available
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Investopedia. (2017). Floating Exchange Rate. [online] Available at:

http://www.investopedia.com/terms/f/floatingexchangerate.asp [Accessed 12 Sep. 2017].

Investopedia. (2017). The Effects Of Currency Fluctuations On The Economy. [online] Investopedia.
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Pettinger, T. (2017). The effects of an appreciation | Economics Help. [online] Economicshelp.org.

Available at: http://www.economicshelp.org/blog/10050/economics/effects-appreciation/
[Accessed 27 Aug. 2017].

Phillips, K. (2016). The mining boom that changed Australia. [online] Radio National. Available at:
http://www.abc.net.au/radionational/programs/rearvision/the-mining-boom-that-changed-
australia/7319586 [Accessed 12 Sep. 2017].

Reserve Bank of Australia. (2017). Monetary Policy | RBA. [online] Available at:
http://www.rba.gov.au/monetary-policy/ [Accessed 12 Sep. 2017].

Tang, E. (2017). Australia has experienced the longest period of economic growth in the developed
world - Austrade. [online] Austrade.gov.au. Available at:
https://www.austrade.gov.au/news/economic-analysis/australia-has-experienced-the-longest-
economic-growth-among-major-developed-world [Accessed 24 Aug. 2017].
Tradingeconomics (2017). Australian Dollar | 1993-2017 | Data | Chart | Calendar | Forecast |
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2017].
Tulip, P. (2014). The Effect of the Mining Boom on the Australian Economy. [ebook] Rerserve Bank of
Australia. Available at: https://www.rba.gov.au/publications/bulletin/2014/dec/pdf/bu-1214-3.pdf
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