Foreign Exchange Rates

Monthly Statistical Bulletin Feature Articles

In a market economy all commodities have prices which are expressed in terms of local currency. This causes no problems when there is no trade with foreign countries. However, importers need to buy foreign currency so they can pay for foreign sourced goods and services and exporters need to sell foreign currency so they can so that they repatriate their earnings. This buying and selling by importers and exporters take place on the foreign exchange market. The price of foreign currency is called the exchange rate.

The exchange rate between Australian and overseas currencies is expressed in terms of the amount of foreign currency $A1.00 will buy. Thus unlike other commodities the exchange rate with the US dollar is not expressed as the price that Australians need to pay for one US dollar but the price that holders of US dollars need to pay for one Australian dollar. This means that when the Australian dollar is stronger, ie worth more, the exchange rate goes up; when the Australian dollar is weaker, ie worth less, the exchange rate goes down.

The relative value of the Australian dollar can thus be gauged from the exchange rate prevailing at any time.

The two most often quoted measures of the value of the Australian dollar are in terms of the United States dollar and the trade weighted index.

United States Dollar

Although Japan has a greater share of Australia's foreign trade than the United States the US dollar exchange rate is usually taken as an indicator of the strength of the Australian dollar. The value quoted in the media shows the price of an Australian dollar in terms of US dollars. An increase in this value shows a strengthening Australian dollar which is in turn indicative of an improving trade performance with respect to the US. and to export contracts written in terms of US dollars.

Graph 1 shows the end of month US dollar exchange rate since January 1980.

Graph 1 shows the end of month US dollar exchange rate since January 1980.

Trade Weighted Index

The Trade Weighted Index (TWI) is a measure of the value of the Australian dollar in a broader trading perspective than that given by reference to one currency alone.

The TWI is an index of the weighted average value of the Australian dollar with respect to a basket of currencies. This basket includes currencies of Australia's trading partners which together make up 90% of our import and export trade. Currently there are 24 currencies in this basket. Weights for currencies in the basket are re-assessed every October on the basis of trade figures for the previous financial year. Figures using the new weights are spliced onto the old to give a continuous series with its base year 1970 at an index of 100.

The TWI is calculated three times every business day on exchange rates prevailing at 9 am, noon and 4 pm. The 4 pm figure is reported widely in the evening electronic news media and in the following day's newspapers. Graph 2 shows the movement in the end of month TWI since 1980.

Graph 2: Trade Weighted Index

MESI Table 6.4

Monthly Economic and Social Indicators Table 6.4 shows monthly data on the US dollar exchange rate and the TWI monthly for the current financial year and the four previous financial years. These data are graphed to show the trend in the data over the time period.Table 6.4 is updated monthly.

Further information can be obtained by contacting a member of the Statistics Group of the Parliamentary Research Service.

This feature was prepared by Greg Baker.

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