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How Exchange Rates affect us

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Our Aussie dollar moves up and down against the US dollar, euro, pound and yen daily – but what does it all mean and how does it affect everyday Australians? Here is a simple explanation of the impact of different exchange rates.

Imagine you wanted to buy a product online for US$100. You have Australian dollars, so in effect you actually make two purchases – firstly, you buy US$ and then you buy the product.

If the exchange rate of the Australian dollar is, say $1.03, you would pay less Aussie dollars to buy the US dollars so the product would cost only $97 (US$100/$1.03).

However, if our dollar was 90 cents, you would have to spend $111 (US$100/$0.90) to buy the US currency before buying the product.

In other words, to convert overseas currencies to Australian dollars, always divide the other currency by our exchange rate.

Which means a higher exchange rate means goods bought overseas cost us less. This is good for consumers but it puts pressure on local industries that have to compete with cheaper imported goods.

There’s always another side

Movements in exchange rates work the other way for exporters – they like it when the exchange rate is lower.

Let’s imagine you write software programs and sell them to customers in America for US$1,000 each. You want to deposit the proceeds from each sale into your Australian bank account. If the exchange rate was $1.03, you would receive

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only $970 for each program. If the exchange rate dropped to 90c, which is more realistic these days, you would end up getting around $1,111 each.

This is why farmers and miners who sell their products overseas don’t like it when exchange rates rise – their incomes fall.

Like wise for Australian investors in overseas markets, International shares values in Australian dollars fall when the Australian dollar rises.

A way of removing the volatility and risk that currency causes is to put hedging on the overseas investments. This usually comes at a modest cost but means currency fluctuations no longer impact on the investment’s value. For some investors this is a desirable outcome.

In a global economy there are many forces impacting on exchange rates and the experts say no country can control the ups and downs. The movements and the impacts are something governments, consumers and industries have to live with.

In general terms there are always winners and losers whatever the Aussie dollar is worth.

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