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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