Why does currency fluctuate?
While you should always keep your core business as the main focus of any foreign exchange strategy, it also helps to know why currency fluctuates to help determine whether you should consider trading in a major currency—such as US dollar, pound sterling or euro—even if not trading with the home country of those currencies, or whether it may be worthwhile selling in your buyer’s currency.
The strength of the Australian dollar will affect exporters in a number of ways; it affects the price and/or margin of goods and services, which will influence competitiveness against other countries’ exporters. A low dollar may attract more business, while a high dollar gives extra purchasing power to exporters that import or that have expenses in other currencies, for example for offshore operations or travel.
Factors that influence demand for a currency include a country’s inflation, its interest rates, economic outlook, monetary policies, and the buying and selling activities of speculators. This means that currencies do not move in tandem with each other, so it is possible for the Australian dollar to rise against the euro while falling against the yen, for example.
Due to global economic volatility, it pays to re-examine your foreign exchange strategy in light of commodity prices and the interest rates and the strength of the domestic economy in the currency’s home country. Demand for commodities and commodity prices for some of Australia’s main exports therefore contribute to the overall strength of our dollar, which is why you should keep an eye on those figures even if they are not part of your industry.
Interest rates and the strength of a country’s domestic economy also play roles in currency performance. This is mainly due to currency traders and speculators who are attracted to currencies from stable countries with high interest rates. Generally, speculators will sell low-yield currencies to take advantage of higher interest rates; in countries with smaller economies, such as Australia and New Zealand, this can have a sizeable impact on the currency.