currency appreciation. As consumer preferences change in favour of foreign goods and services, the demand for imports increases. The supply of Australian dollars on foreign exchange markets also increases and the currency depreciates. Capital outflow from Australia increases the supply of Australian dollars on foreign exchange markets as investors sell our currency to obtain the currency of the host nation. Any increase in capital outflow adds to the supply of Australian dollars, causing a currency depreciation, while a decrease in the level of capital outflow reduces the supply of Australian dollars and leads to a currency appreciation. The value of the Australian dollar falls when speculators expect a future depreciation of our currency. As speculators sell their Australian dollars to avoid future losses, the present supply of our currency rises. The increase in supply causes the Australian currency to depreciate. The reverse occurs when the value of the Australian dollar is expected to increase in the future. In this case, speculators will hold their Australian dollars, effectively decreasing the supply, and causing the currency to appreciate. As the forces affecting the value of our dollar are more dependent on profit and investment prospects than it is on our basic trade situation, our exchange rate is unstable. This affects the decisions of exporters and importers. From the point of view of our current account, our exchange rate has in some periods been too high and too unstable....
