The Implications For An Economy Of A Rising Exchange Rate Essay

The Implications For An Economy Of A Rising Exchange Rate - Essay Example The performance of a specific currency is determined by the demand for the currency and the investments on the economy. An increased exchange rate of a country’s currency in relation to world currencies such as the dollar influences negatively on the export of the country’s products. On the other hand, the cost of imports is decreased by a strengthening currency and therefore more goods and services are imported. However, a strong currency discourages foreign investment and as a result, central banks use various strategies to ensure that currencies are regulated. This acts to protect the manufacturing industries from business failure due to reduced exportation of goods and competition. This paper gives a critical analysis on the impact of the rising exchange rate on world economies such as Australia, China, and Switzerland. The Australia’s steel export industry was impacted negatively by the rising exchange rate in July 2011 when the Australian dollar hit the highest point ever recorded in thirty years. This means that the value of the Australian dollar in relation to other currencies increased steadily. The demonstration for the negative impact of the rising exchange rate of the Australian dollar on the economy is seen in the increases in the cost of the raw materials for the industry in addition to the decreasing prices of steel . 1. Moreover, the strength of the Australian dollar led to the reduction of the export of goods and services from the agricultural, retail, tourism, and manufacturing sectors of the country’s economy. Foreign countries reduced their import of agricultural products from Australia due to the strength of its currency. The importance of agriculture and manufacturing industry in Australia shows the extent to which reduced exports of goods from these sectors affected the economy. Figure 1 Foreign Exchange Rate Australia/US Because of a rising exchange rate, the manufacturing industry of countries incurs big losses. For example, the Australian steel industry incurred a net loss of about US$1.1bn as a result of the appreciation of the Australian dollar2. The loss was due to asset write downs and reduction of the export activities. The impact of a rising exchange rate leads to the involvement of governments in an attempt to revive the failing economies. For example, the Australian government channeled funds to the steel industry to enable it to recover from the losses incurred due to the reduction of the country’s steel exports. The impact of the government involvement on the economy is twofold: the funds channeled to the industries for their recovery would lead to the improvement of the economy or reduce economic performance due to inappropriate prioritization of funds. The government involvement in the improving its manufacturing industrie s should therefore consider other sectors of the economy so that realistic distribution of funds is made possible. The exportation of a country’s products reduces when the currency strengthens because the prize of the exports and the costs associated with the shipments of the exports rise when the currency becomes strong. As a result, foreign importers from a country with a strong currency may reduce or terminate their imports from that country. As a result, the sectors of the economy, which export goods, are impacted negatively3. A rising exchange rate also affects the job market4. Because of the loss of revenue, which results from reduction of exports, a company is likely to reduce its workforce as a way of minimizing expenses. Blue scope, which is the largest producer of steel in Australia, for example reduced its work force by retrenchment following the reduction of its exports.