Another ER question (1 Viewer)

[hyperbole]

Hey,

Um, its another exchange rate question. Everyone seems to be having so much problems with it...lol.
My question is:

The greater the supply of AUD, the lower the exchange rate,
The smaller the supply, the higher the exchange rate right??

So when countries buy AUD to purchase our exports, demand increases thus higher exchange rate. But when we import goods, don't we buy their currency, not sell ours. I don't get it! I don't understand why selling our currency lowers the exchange rate. How does selling our currency increase supply

 

[mattchan]

So when countries buy AUD to purchase our exports, demand increases thus higher exchange rate. But when we import goods, don't we buy their currency, not sell ours. I don't get it! I don't understand why selling our currency lowers the exchange rate. How does selling our currency increase supply

I believe....we simply cannot buy another currency for free and hence, we must sell our $AUD to buy another currency. That means we sell our $AUD and increase the AUD supply. An oversupply of AUD over the demand of AUD will depreciate our dollar.

 

[Left-ism]

selling our currency implies exchanging it for another currency.
when we import, we need to purchase/exchange (convert AUD into foreign) our currency for a foreign currency. think about it..similarly, when you go overseas, you convert your AUD into a foreign currency, hence supplyin AUD into the market for foreign exchange (FOREX).

now we can apply simple economic theory, that when supply is increase, more is available and hence price falls. so the ER falls on the forex market.

 

[milrock]

and what does this do to Australia's competitiveness?

 

[milrock]

and also when are dollar is weak this benefits Australian exporters right? As they can now go and sell their G&S overseas say in the US where more people will buy their product as its cheaper, but aussie importers will suffer as anything they import from overseas (lets say the US again) will cost more as they will need more aussie dollars to buy it.

 

[RyddeckerSMP]

and what does this do to Australia's competitiveness?

When the AUD is lower, thus exports are higher, Australia is more competitive as overseas importers can buy more of our product for less money, however when the AUD is higher it is the reverse scenario......

 

[RyddeckerSMP]

and also when are dollar is weak this benefits Australian exporters right? As they can now go and sell their G&S overseas say in the US where more people will buy their product as its cheaper, but aussie importers will suffer as anything they import from overseas (lets say the US again) will cost more as they will need more aussie dollars to buy it.

Yep, got it in one......