Australia experiences high inflation rates relative to other nations, exports will become more expensive and therefore less competitive. A currency depreciation occurs as the demand for the Australian dollar falls. An appreciation of Australia's currency, will occur similarly if Australia has low inflation rates in comparison to other countries.. Changes in relative incomes also influence demand as the volume of imported goods purchased by consumers tends to vary directly with their level of income. As income levels increase, consumer demand for imported goods rises; and as income levels fall, consumer demand for imported goods decreases. Rising income levels in other countries relative to those in Australia cause an increase in demand for our exports and, thus and appreciation of the Australian dollar. The opposite occurs with a fall in other incomes. Consumer preferences and tastes change over time. Naturally, any change in the preferences of overseas consumers for our exports affects our exchange rate. If overseas consumers preferences change in favour of Australian-made goods, then demand for our currency to pay for these goods increases. This, in turn, causes an appreciation of the Australian dollar, and vice-versa in preferences change against Australian. Australia is host to much foreign investment. Any increase in capital inflow means an increase in the demand for Australian dollars and a currency appreciation, and a decrease would result in a depreciation. There are a number of factors affecting the volume of capital inflow into Australia. Firstly, the level of real interest rates in Australia relative to those in other countries is an important consideration to investors. An increase in real interest rates in Australia makes investment more attractive, but a fall will have the reverse effect. Secondly, the level of confidence in the Australian economy influences investment decisions by overseas investors. Lack of confidence in...
