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With a floating exchange rate such as Australias supply and demand factors largely determine the dollars equilibrium price The exchange rate is sensitive to changes in both demand and supply which can cause changes in the equilibrium exchange rate Another factor which can affect the supply and demand of Australian dollars is intervention in the market by the Reserve Bank of Australia DEMAND The demand for Australias currency in the foreign exchange market Forex is a derived demand It is derived from the demand for a countrys exports of goods and services and its assets In simple terms people who may have a demand for the Australian dollar could include Foreigners wanting to purchase Australian exports International tourists visiting Australia International investors wishing to purchase Australian shares or property International firms setting up branches or expanding in Australia Speculators and investors who think the value of the Australian dollar will rise in hope of making a profit The demand for the Australian dollar will be affected by a number of factors These factors are The Size of financial flows into Australia The size of financial flows into Australia from investors who wish to invest in Australia and need to convert their currency into AUD will affect demand for the dollar The level of capital inflow will be affected by the level of Australian interest rates relative to overseas interest rates as well as the level of confidence in the Australian economy If Australia has relatively higher interest rates and stronger confidence then this will encourage capital inflow and increase demand for the AUD Using this theory the Australian dollar at the present looks to be in a relatively strong position Interest rates are beginning to rise official interest rate has recently been risen 025 points to 45 and is expected to raise to 525 by September this year with economic growth expected to be around 375 in 200203
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