Question

If the U.S. government decides to reimpose a higher tariff on the importation of Australian goods, what would be the change in the exchange rate of USD/AUD? Discuss the reason(s).

Answer 1

Exchange rate of two countries are determined by the demand and supply of the currency, along with other factors.

If USA chooses to impose tarrif on Australian Import, this will increase the import prices. With high import prices, the amount of import will go down as demand reduces when price increase. All the imports are paid in the home currency, i.e in AUD in current scenario. If import goes down the requirement of AUD will also go down. With supply of AUD remaning constant, a decrease in demand for AUD will decrease the prices.

Thus, AUD will decrease as compared to Dollar.