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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