In late 2022, economic analysts predicted that Australia would experience a significant slowdown in export-led growth due to a cooling global property market and reduced demand for key mineral resources. Commodity prices, particularly for iron ore and coal, began to decline from their historic peaks. Economists painted a challenging picture for the domestic economy, predicting GDP growth to fall to just 1.2% in 2023.
Amidst this cooling demand, the Australian dollar (AUD) continued to slide, falling from a high of over 0.78USDtonear 0.78 USD to near \,0.78USDtonear0.64 USD. Australian tourists traveling to North America and Europe faced significantly higher costs, while local importers complained of escalating prices for overseas manufactured components.
On the other hand, a weaker Australian dollar was welcomed by some sectors. Service exporters, particularly higher education and inbound tourism, saw an influx of international students and visitors attracted by the cheaper cost of living in foreign currency terms. Domestic agricultural producers also found their wheat and beef more price-competitive on the global market.
It is not difficult to understand why the Australian dollar has weakened against the US dollar and other major currencies. Speculators are actively divesting from commodity-linked currencies as global growth forecasts soften. Additionally, a narrowing interest rate differential has played an important role, as the US Federal Reserve raised interest rates much more aggressively than the Reserve Bank of Australia (RBA). Concerns over Australia's long-term productivity outlook have further dampened investment appetite.
The volatility of the currency has renewed debate over the benefits of Australia's free-floating exchange rate regime. Proponents of a float argue that it acts as an essential macroeconomic shock absorber, shielding the domestic economy from external trade shocks. Opponents, however, point to the inflation risk imported through more expensive consumer goods and machinery, urging closer consideration of foreign exchange intervention or managed pegging strategy during periods of high volatility.
Extract B argues that 'it is not difficult to understand why the Australian dollar has weakened against the US dollar and other major currencies'.
Explain what is meant by 'the Australian dollar has weakened against the US dollar and other major currencies' and analyse two determinants of such a weakening.
310 exam-style questions on AQA A Level Economics 2.6 The international economy (A-level only), covering 2.6.1 Globalisation, 2.6.2 Trade, 2.6.3 The balance of payments, 2.6.4 Exchange rate systems, and 2.6.5 Economic growth and development. Each one has a worked solution and a mark scheme showing where the marks go.