The Australian dollar is popular with currency traders, because of the comparatively high interest rates in Australia, the relative freedom of the foreign exchange market from government intervention, the general stability of Australia's economy and political system, and the prevailing view that the Australian dollar offers diversification benefits in a portfolio containing the major world currencies, especially because of its greater exposure to Asian economies and the commodities cycle.[4] The currency is commonly referred to by foreign-exchange traders as the "Aussie."
Value of the Australian dollar
In 1966, when the Australian dollar was introduced, the international currency relationships were maintained under the Bretton Woods system, a fixed exchange rate system using a U.S. dollar standard. The Australian dollar, however, was effectively pegged to the British pound at an equivalent value of approximately 1 gram of gold.
The highest valuation of the Australian dollar relative to the U.S. dollar was during the period of the peg to the U.S. dollar. On 9 September 1973, the peg was adjusted to US$1.4875, the fluctuation limits being changed to US$1.485 - US$1.490[9]; on both 7 December 1973 and 10 December 1973, the noon buying rate in New York City for cable transfers payable in foreign currencies reached its highest point of 1.4885 U.S. dollars to one Australian dollar.[10]
On Monday 12 December 1983, the Australian dollar was floated, allowing its value to fluctuate dependent on supply and demand on international money markets. The decision was made on 8 December 1983 and announced on 9 December 1983. [11]
In the two decades that followed, its highest value relative to the US dollar was $0.881 in December 1988. The lowest ever value of the Australian dollar after it was floated was 47.75 US cents in April 2001.[12] It returned to above 96 US cents in June 2008,[13] and reached 98.49 later that year. Although the value of the Australian dollar fell significantly from this high towards the end of 2008, it gradually recovered in 2009 to 94 US cents.
On 15 October 2010, the Australian dollar reached parity with the US dollar for the first time since becoming a freely traded currency, trading above US$1 for a few seconds.[14] The currency then traded above parity for a sustained period of several days in November, and fluctuated around that mark into 2011.[15] On 2 May 2011 the Australian Dollar hit a record high since the floating of the dollar. It traded at a $1.1011 against the US Dollar. [16] Some have even suggested the dollar could rise as high as 1.70 USD by 2014. [17]
Some commentators claim that the value of the dollar in 2011 is related to Europe's sovereign debt crisis, and Australia's strong ties with material importers in Asia and in particular China.[18]
Economists posit that commodity prices are the dominant driver of the Australian dollar, and this means changes in exchange rates of the Australian dollar occur in ways opposite to many other currencies.[19] For decades, Australia's balance of trade has depended primarily upon commodity exports such as minerals and agricultural products. This means the relative value of the dollar varies significantly during the business cycle, rallying during global booms as Australia exports raw materials, and falling when mineral prices slump or when domestic spending overshadows the export earnings outlook. This movement is in the opposite direction to reserve currencies, which tend to be stronger during market slumps as traders move value from falling stocks into cash.
Although not considered a reserve currency, high volatility and its unorthodox movement in exchange rates has contributed to the AUD's status as one of the most traded currencies in the world.[4] Other factors include a relative lack of central bank intervention, and general stability of the Australian economy and government
Exchange rate policies
Prior to 1983, Australia maintained a fixed exchange rate. The first peg was between the Australian and British pounds, initially at par, and later at 0.8 GBP (16 shillings sterling). This reflected its historical ties as well as a view about the stability in value of the British pound. From 1946 to 1971, Australia maintained a peg under the Bretton Woods system, a fixed exchange rate system that pegged the U.S. dollar to gold, but the Australian dollar was effectively pegged to sterling until 1967.
With the breakdown of the Bretton Woods system in 1971, Australia converted the traditional peg to a fluctuating rate against the US dollar. In September 1974, Australia valued the dollar against a basket of currencies called the trade weighted index (TWI) in an effort to reduce the fluctuations associated with its tie to the US dollar.[21] The daily TWI valuation was changed in November 1976 to a periodically adjusted valuation.
On 12 December 1983, the Australian Labor government led by Prime Minister Bob Hawke and Treasurer Paul Keating floated the Australian dollar, with the exchange rate reflecting the balance of payments and other market drivers.
Value of the Australian dollar
In 1966, when the Australian dollar was introduced, the international currency relationships were maintained under the Bretton Woods system, a fixed exchange rate system using a U.S. dollar standard. The Australian dollar, however, was effectively pegged to the British pound at an equivalent value of approximately 1 gram of gold.
The highest valuation of the Australian dollar relative to the U.S. dollar was during the period of the peg to the U.S. dollar. On 9 September 1973, the peg was adjusted to US$1.4875, the fluctuation limits being changed to US$1.485 - US$1.490[9]; on both 7 December 1973 and 10 December 1973, the noon buying rate in New York City for cable transfers payable in foreign currencies reached its highest point of 1.4885 U.S. dollars to one Australian dollar.[10]
On Monday 12 December 1983, the Australian dollar was floated, allowing its value to fluctuate dependent on supply and demand on international money markets. The decision was made on 8 December 1983 and announced on 9 December 1983. [11]
In the two decades that followed, its highest value relative to the US dollar was $0.881 in December 1988. The lowest ever value of the Australian dollar after it was floated was 47.75 US cents in April 2001.[12] It returned to above 96 US cents in June 2008,[13] and reached 98.49 later that year. Although the value of the Australian dollar fell significantly from this high towards the end of 2008, it gradually recovered in 2009 to 94 US cents.
On 15 October 2010, the Australian dollar reached parity with the US dollar for the first time since becoming a freely traded currency, trading above US$1 for a few seconds.[14] The currency then traded above parity for a sustained period of several days in November, and fluctuated around that mark into 2011.[15] On 2 May 2011 the Australian Dollar hit a record high since the floating of the dollar. It traded at a $1.1011 against the US Dollar. [16] Some have even suggested the dollar could rise as high as 1.70 USD by 2014. [17]
Some commentators claim that the value of the dollar in 2011 is related to Europe's sovereign debt crisis, and Australia's strong ties with material importers in Asia and in particular China.[18]
Economists posit that commodity prices are the dominant driver of the Australian dollar, and this means changes in exchange rates of the Australian dollar occur in ways opposite to many other currencies.[19] For decades, Australia's balance of trade has depended primarily upon commodity exports such as minerals and agricultural products. This means the relative value of the dollar varies significantly during the business cycle, rallying during global booms as Australia exports raw materials, and falling when mineral prices slump or when domestic spending overshadows the export earnings outlook. This movement is in the opposite direction to reserve currencies, which tend to be stronger during market slumps as traders move value from falling stocks into cash.
Although not considered a reserve currency, high volatility and its unorthodox movement in exchange rates has contributed to the AUD's status as one of the most traded currencies in the world.[4] Other factors include a relative lack of central bank intervention, and general stability of the Australian economy and government
Exchange rate policies
Prior to 1983, Australia maintained a fixed exchange rate. The first peg was between the Australian and British pounds, initially at par, and later at 0.8 GBP (16 shillings sterling). This reflected its historical ties as well as a view about the stability in value of the British pound. From 1946 to 1971, Australia maintained a peg under the Bretton Woods system, a fixed exchange rate system that pegged the U.S. dollar to gold, but the Australian dollar was effectively pegged to sterling until 1967.
With the breakdown of the Bretton Woods system in 1971, Australia converted the traditional peg to a fluctuating rate against the US dollar. In September 1974, Australia valued the dollar against a basket of currencies called the trade weighted index (TWI) in an effort to reduce the fluctuations associated with its tie to the US dollar.[21] The daily TWI valuation was changed in November 1976 to a periodically adjusted valuation.
On 12 December 1983, the Australian Labor government led by Prime Minister Bob Hawke and Treasurer Paul Keating floated the Australian dollar, with the exchange rate reflecting the balance of payments and other market drivers.
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