Introduction

Since the 2008-9 global financial crises, Australian has been progressively recovering from the recession; there’s been slightly increase and decrease since then, however according to the figures by the (Reserve Bank of Australia’s (RBA), 2014), the exchange rate of the Australian dollar against the US dollar, although has been fairly steady over the last 36 months though there have been rise and fall in the exchange rate. Some of the causes of these activities will be discussed.

An exchange rate plays an important role in a country’s level of trade, which is critical to most every free market economy in the world. Nevertheless exchange rates matter on a smaller scale as well: they impact the real return of an investor’s portfolio. Therefore we look as some of the major forces behind exchange rate movements.

There are many factors that influence the value of the Australian dollar compare to other currencies. These include:

• Differentials in Interest rate – This is the difference between real interest rates between countries; higher interest rates attract foreign capital and cause the exchange rate to rise.
• Relative inflation rates between nations – Higher relative inflation will reduce demand for exports and increase demand for imports, thus lowering the value of the currency.
• Commodity Prices /Terms of Trade – If the price of a country’s exports rises by a greater rate than that of its imports, its terms of trade have favourably improved.
• Growth in Real GDP – Domestic growth affects the demand for imports but growth rates in the international economy will influence the level of a nation’s exports.

This essay will focus on the movement in the exchange rate over the last 36 months. As indicated by RBA, Australia’s exchange rate has been slowly decreasing since 2011with slight peaks in between. According to Figure 1, from August 2011 to early 2012 there have been slight hike and drop in the trend, however from mid-2012 to beginning of 2013 there was a steady movement, then around April 2013 to June 2013 there was a sharp decline in the exchange rate, there was a slight increase in October still the exchange rate decline in end of 2013 to beginning of 2014 and has been slowly rising.

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These declines in the exchange rate are triggered by various factors of which will be discussed.

Thus, the movement identified in the figure will be discuss

The paper will focus mainly on identifying the movement in the exchange rate graph (above) and explaining the cause of the movement.

• Decline from August to October 2011
• Decline from April to June 2012
• Steep decline from the year February to August 2013
• Slight increase from the year August to October 2013
• Slight decrease from October to December 2013
• Steady movement since beginning of 2014 to current month.