the Australian economy or pessimistic predictions as to its performance increase the perceived risk of investing here while optimism regarding the future direction of economic activity in Australia raises the expectations of overseas investors. These will lead to either a depreciation, or an appreciation in currency. Speculation on foreign exchange markets occurs when currencies are bought and sold for the sole purpose of making a profit. Most speculation is based on expectations regarding the relative movements of exchange rates. Speculators base their forecasts on anything that affects the value of currencies - the performance of the current account, the signing of trade agreements, government economic policy decisions, political events, rumours, wars, and so on. This too make appreciate or depreciate Australia's currency. The supply of Australian dollars on foreign exchange markets depends primarily on the economic activities of Australian residents. Just as foreigners must pay for our exports with Australian dollars, we must use the relevant foreign currency to pay for imported goods. An increase in demand for imported goods by Australian consumers adds to the supply of Australian dollars, and the currency depreciates. On the other hand, a fall in demand for imported goods reduces the supply of Australian dollars, causing a currency appreciation. High inflation rates in Australia relative to those of our major trading partners mean that imported goods are cheaper than domestically produced goods. As Australian consumers switch their demand from local goods to imports, the supply of Australian dollars increases and the currency depreciates. The reverse occurs with low inflation rates. A rise in the level of income in Australia relative to those in other countries leads to an increase in the demand for imported goods. A currency depreciation occurs as the supply of Australian dollars rises. On the other hand, a fall will result in a ...
