Introduction to the AUDUSD
In the US Dollar spot exchange rate, AUDUSD and the EuroUSD are both currencies that have their own share of merits and demerits. You can also use the EURUSD to determine the value of your savings account and other currency transactions in the world market.
Of course, there is nothing like the dollar spot rate to give you the precise value of your savings or your investments. The currency conversion rates are the value at which a given number of US dollars or any other foreign currency is being sold for one US dollar. It's just that they're quoted and calculated differently, since there is a lot more to the US dollar transaction than just purchasing one US dollar for another.
There are several factors that influence these simple differences between the two rates. It all boils down to how much a country's central bank controls the money supply, on the one hand, and how many US dollars are in circulation at any given time on the other.
The central bank issues money (that is, banknotes and coins) to the public. The government's fiscal policy is also involved. The government will not spend if it has insufficient resources to pay for it, so it must print money to meet this budget deficit.
This process does not occur immediately, because the central bank must stabilize the value of the currency before it can issue more. It does this by buying or selling assets (such as dollars), selling treasury bills, short-selling (buying) interest-bearing assets and long-selling securities.
At any point in time, the central bank will be using its power to control the quantity of currency in circulation to attempt to maintain its desired rate of inflation (as measured by the CPI). It also tries to maintain a consistent level of employment.
When the central bank starts printing money and spending more than it earns through taxation, inflation can occur. If there is too much debt or inflation, the public tends to withdraw their savings from banks and invest them in assets that offer greater returns. Since the government's income is also related to the GDP (gross domestic product), there is an increase in prices and/or wages for the goods and services produced.
The same is true when the central bank printing presses slows down (i.e., stops). One result is that the exchange rate becomes more or less stable, i.e., the DollarUSD becomes closer to the EuroUSD. Alternatively, when the monetary authorities decide to extend credit and spend more than they earn, then the country will start to expand.
For those who wish to purchase an asset in US dollars that are far below their value in terms of EuroUSD, the steady exchange rate allows a further saving (in terms of US dollars) in terms of Euros. This is what makes the difference between a loss and a gain when deciding to buy one foreign currency or the other. When prices rise for a certain currency, the real gain is the depreciation of that currency, so that you will receive more Euros from the purchase of one Dollar USD at current exchange rates than you would have in your local currency.
When the price of one currency increases and the other falls, both currencies will tend to converge to that new equilibrium. The central bank will be either slowing down or speeding up its interventions to bring the two currencies together and so are said to be exchanging one for the other.
Then, the central bank liquidity also acts to stabilize the value of one currency. The simplest explanation for this is that an increased amount of credit to the private sector (whether it's a tax break government stimulus, or quantitative easing) causes a greater demand for money, which in turn leads to a greater supply of currency.
As long as the exchange rate is going to remain stable, then there will be no problem trading one currency for another (that is, the EURUSD and the USDDollar will go up and down) at the same time. If a country's central bank faces a problem, it may print more money to keep the exchange rate level – but it also would be wise to get used to the fact that one currency might become more valuable than the other.