An article stated that, \"The Australian dollar tumbled lower after lower that e

Question

An article stated that, "The Australian dollar tumbled lower after lower that expected inflation data reduced investors expectations that the central bank would raise interest rates, why would the inflation rate being lower than expected make it less likely that the Australian central bank would raise interest rates? Why would the fact that it was less likely that the Australian central bank was going to raise interest rates cause the value of the Australian dollar to fall? An article stated that, "The Australian dollar tumbled lower after lower that expected inflation data reduced investors expectations that the central bank would raise interest rates, why would the inflation rate being lower than expected make it less likely that the Australian central bank would raise interest rates? Why would the fact that it was less likely that the Australian central bank was going to raise interest rates cause the value of the Australian dollar to fall? An article stated that, "The Australian dollar tumbled lower after lower that expected inflation data reduced investors expectations that the central bank would raise interest rates, why would the inflation rate being lower than expected make it less likely that the Australian central bank would raise interest rates? Why would the fact that it was less likely that the Australian central bank was going to raise interest rates cause the value of the Australian dollar to fall?

Explanation / Answer

Though the inflation rate is lower than expected, it is less likely that Australian central bank will raise interest rates because if central bank raises interest rates the Australian dollar becomes stronger giving more purchasing power to purchase foreign goods & products. This creates problems for domestic companies to compete with cheap foreign products. Domestic products become expensive in international markets. If companies are unable to compete it will increase domestic unemployment. Strong dollar will reduce exports due to expensive products. Australian central bank wants to improve global competitiveness, increase national income & maintain employment.

The fact that it is less likely that Australian central bank was going to raise interest rates, the value of Australian dollar will fall because there will be less foreign cash flow in the country. Investor will not be able to take advantage of ‘yield differential’. Australian deposits will become less attractive resulting in lower demand for Australian dollar & in turn the value of Australian dollar will fall.

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