Exchange rates and commodity prices: the Australian case

Summary

The likely effects of variations of exchange rates between the Australian dollar, the US dollar, the Deutschmark and the Yen on prices of four commodities – coal, iron ore, wheat and wool – are considered with the following mean empirical findings:

• World prices (and the exchange rate) are at least as important as wages in their influence on inflation in Australia.
• The value of the A$ is heavily affected by wages and external prices; With the A$ worth $US 0.78, the A$ is overvalued by 4 to 8%.
• The expectation of a possible devaluation of the A$ some time in the future helps to explain why interest rates are so high in Australia relative to the rest of the world.
• Exchange rates account for 12% of the variability of coal prices, 52% for iron ore and 90% for wheat.

Keywords: exchange rates, commodities, coal, iron ore, wheat, wool