Foreign Exchange Rates
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.
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.
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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