Unless you’re an importer or planning an overseas holiday, reports on the movement of the Australian dollar are usually met with a stifled yawn; but the story of the “little Aussie dollar” can be interesting reading.
When Australia converted to the decimal monetary system in 1966, international currency relationships were maintained under the Bretton Woods system of money management, which fixed the value of currencies to the US dollar. At the time, the Australian dollar was aligned to the British pound (£), with $A2.50 buying £1. The following year, the pound fell against the US dollar but the Australian dollar maintained its value, with $A1 being worth $US1.12.
The collapse of the Bretton Woods system in 1971 prompted Australia to adopt a ‘moving’ peg against the US dollar, but this was challenging. In 1974, the decision was made to value our dollar against a basket of currencies called the ‘trade weighted index’. This approach relied on a fixed currency system: the Reserve Bank of Australia (RBA) set a value for our dollar adjusting it periodically to reflect global changes. However, this was inefficient and limited the ability of the RBA to manage the economy using monetary policy (interest rates).
In December 1983, the Australian government “floated” our dollar, which allowed the supply and demand in the international money market to set the value of the exchange rate.
Over the years, the Australian dollar depreciated against the US dollar, falling to an all-time low of US47¢ in April 2001. By mid-2008 it had recovered to above US96¢ but this peak didn’t last long as the global financial crisis saw many speculators selling other currencies to buy US dollars causing it to drop to a month average of 64¢ in February 2009.
Since that low, our Aussie battler recovered to exceed the US$, reaching its highest value of $1.1055 against the US currency in July 2011. In more recent times, the slowing of China’s economy and the raising of US interest rates have combined to cause the dollar to hover around the 70¢ mark.
What affects our dollar in the world markets?
One reason is that the Australian dollar is popular with currency traders. It is currently the fifth-most-traded currency in the world foreign exchange markets, and accounts for approximately 5% of worldwide foreign exchange transactions.
Other appealing aspects of our dollar include:
- The value of our dollar tends to move in the opposite way to many other currencies offering diversification benefits for investors holding a currency portfolio.
- Intervention by the RBA is minimal, allowing supply and demand to determine its value.
- Our interest rates are currently high compared to other countries; we have high exposure to the Asian economies such as China, and strong commodity prices.
- We remain more economically and politically stable than Europe and the US.
Australia may not have a huge impact on the world’s big economies but we should be proud of our dollar.