Consider the circumstances of your average Australian backpacker. They save $5,000 Australian dollars for the trip and at the time of departure, the Australian dollar is especially strong, fetching ninety Euro cents to the dollar. Their $5,000 will convert over to €4,500 (ignoring the various costs involved in exchange). On the other hand, if the Australian dollar is weak and only converts at fifty Euro cents, the $5,000 becomes only €2,500! Obviously, the strong Australian dollar makes overseas travel more appealing for the traveller. In the same way, a weak Australian dollar encourages travellers to come to Australia and spend their tourist dollars with local businesses.
The same principle applies to businesses that are involved in import and export.
When the Australian dollar is strong, Australian importers can purchase more foreign products with the same amount of money. When the Australian dollar is weak, overseas businesses are encouraged to purchase Australian products and export them to their countries.
With higher levels of tourism, and more export sales than import purchases, the net result is more money coming into the country than going out, so the country overall benefits.
In addition to encouraging overseas tourists to visit Australia, the poor exchange rate also discourages Australian travellers from heading overseas. Getting back to the backpacker at the beginning of the article, if they decide to travel locally instead, their $5,000 Australian dollars will also end up staying in the Australian economy.
While this is all good news, there is some bad to go along with it. Unfortunately for the consumer, the lower dollar results in higher prices for goods, so while the country is better off, it might be a little hard to see that from the average person’s point of view.
By Jennifer Lowe