Research Note no. 28 2004–05
Exchange rates—the statistics (revised edition)
Greg Baker
Stephen Barber
Statistics Section
8 February 2005
Except for a short period in 2004, the value of the
Australian dollar has been rising steadily against the United States dollar
for several years.
This brief—a revision of Research Note No. 9
of 2000–01—shows details of that rise and provides some of
the relevant statistical background.
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 by 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 than the other currency (that
is, worth more), the exchange rate goes up; when the Australian dollar
is weaker (that is, 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, which is 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 cents of the Australian dollar.
Recent exchange rates
From a low of under 49 US cents to the Australian
dollar in March 2001, the value of the Australian dollar has gradually
appreciated. Table 1 shows the quarterly value of the Australian
dollar in US cents in the period since the beginning of 2001. It shows
that during that period, the dollar has risen from a low of 48.9 US cents
to a high of 77.9 US cents in December 2004.
Table 1: Australian exchange rate quarterly since
March 2001
| End of quarter |
US
cents per
Australian dollar |
| 2001 |
|
| March |
48.9 |
| June |
50.8 |
| September |
49.2 |
| December |
51.1 |
| 2002 |
|
| March |
53.2 |
| June |
56.5 |
| September |
54.4 |
| December |
56.6 |
| 2003 |
|
| March |
60.4 |
| June |
66.7 |
| September |
68.0 |
| December |
75.0 |
| 2004 |
|
| March |
75.9 |
| June |
68.9 |
| September |
71.5 |
| December |
77.9 |
Source: Bulletin, RBA.
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 major trading partners which
together are sufficient to make up at least 90 per cent of our 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.
Against the TWI the Australian dollar rose by 34.5
per cent between its low in 2001 and its high at the end of 2004. This
is a more modest increase than the 59.3 per cent rise from the lows in
2001 to the high in December 2004 when expressed in US dollars.
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