THE LASTING EFFECTS OF THE TERMS OF TRADE BOOM ON THE AUSTRALIAN DOLLAR
Word Count: 1406

Introduction

The Australian Dollar (AUD) has experienced significant appreciation in the last decade culminating in record highs over the last 36 months. This sustained appreciation has raised concerns over the impact that a high AUD has on the Australian economy and its people. This paper analyses the underlying causes of the sustained rise, the impact that the exchange rate plays on the Australian economy and the implications for monetary and fiscal policies, particularly policies that will reduce the overall exchange rate.

Background

There are two distinct trends, which can be discerned from the nominal exchange rate of the AUD against the United States Dollar (USD) over the last 36 months. The AUD has achieved record ‘post float’ highs and sustained strength against the USD for much of this period (Garton, Gaudry, & Wilcox 2012). The trend of appreciation is most notable in Figure 1.1 between August 2011 and April 2013 where the AUD was consistently above parity with the USD. However, in the final 12 months of this period the AUD has fallen below parity and has continued to depreciate until the present day (RBA, 2014). Thus, it can be said that the AUD has experienced two separate trends in recent times, a record period of appreciation followed by a gradual and continuing depreciation.

Figure 1.1: The AUD vs. USD nominal exchange rate over the last 36 months.
Available from Reserve Bank of Australia, 2014.
Appreciation of the AUD

There are three main causes of the appreciation of the AUD, which resulted in record highs achieved between 2011 and 2013.

Terms of Trade Boom

The mining boom, which has substantially increased Australia’s terms of trade, has been a major cause of the appreciating exchange rate over the last 36 months. An economies