Feature Article—Exchange rates1
Introduction
In December 1983 the Australian Government
‘floated’ the Australian dollar. This meant that the government was no
longer prepared to stand in the market ready to support a particular value
of the Australian dollar. Instead it has permitted the value of the Australian
dollar to be set in the foreign exchange market place.
The Australian dollar is bought and sold for
many reasons. Australians who wish to buy goods, services and assets from
the rest of the world will either need to exchange Australian dollars
for foreign currencies or will make payments in Australian dollars to
foreigners who will then wish to sell their Australian dollars in exchange
for their own currency. The opposite happens when foreigners wish to make
a purchase from Australia. Both sets of actions give rise to trade in
the Australian dollar. In addition there are many foreign exchange dealers
and speculators who add liquidity to the market.
Exchange rates
In Australia the exchange rate between Australian
and overseas currencies is expressed in terms of the amount of foreign
currency that one Australian dollar will buy. Thus, unlike other commodities,
the exchange rate with foreign currencies is not expressed as the price
that Australians need to pay for those currencies but the price that holders
of those currencies need to pay for one Australian dollar. This means
that when the Australian dollar is stronger, (i.e. worth more), the exchange
rate goes up; when the Australian dollar is weaker, (i.e. worth less),
the exchange rate goes down.
The relative value of the Australian dollar
can thus be gauged from the exchange rates at any time.
Historical exchange rates
The Australian dollar is traded against many
foreign currencies. Principal of these is the US dollar, the main international
currency and the currency used for most of Australia’s international contracts.
Thus the US dollar value of the Australian dollar is often taken as an
indicator of the health of the Australian currency. This exchange rate
is the most quoted measure of the value of the Australian dollar.
Graph 1 shows for the period since December
1983 the average monthly price in US dollars of the Australian dollar.
Recent exchange rates
The graph shows that from a low of around
49 US cents to the dollar during 2001, the value of the Australian dollar
has gradually increased to a current value above 70 US cents.
Trade weighted index
When the Australian dollar moves in value
against the US dollar it is never clear whether the move originated in
the Australian dollar or the US dollar. For this reason the Trade Weighted
Index (TWI) is used to provide another indicator of the value of the Australian
dollar. The TWI gives a measure of the underlying strength of the Australian
dollar when the US dollar itself may be changing in value.
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 that together
are sufficient to make up at least 90 per cent of Australia’s import and
export trade. Currently there are 23 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 month May 1970 at an index of 100.
Graph 2 shows the movement in the end of month
TWI since December 1983. It, too, shows an increase in the value of the
Australian dollar from lows in 2001.
MESI Table 6.4
Monthly Economic and Social Indicators Table
6.4 shows:
- monthly data on US dollar – Australian dollar exchange rates and
- monthly data on the trade weighted index.
MESI e-data Table 6.4
MESI e-data monthly exchange rate series begin
at July 1969 for the US dollar rate and May 1970 for the trade weighted
index.
- This feature article draws on material in Greg Baker and Stephen Barber,
‘Exchange rates—the statistics’, Research Note, no. 9, Parliamentary
Library, 2000–01.
This feature was prepared by Greg Baker
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