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Over the closing decade of the twentieth century the value of the Australian dollar ($A) generally declined against the major currencies (US dollar, UK pound, and Japanese yen). After falling early in the 1990s, the $A had recovered lost ground against both the US dollar and the UK pound by mid 1996, before decreasing, though with a slight increase in mid 1999, into the new century.
The price of one currency against another is known as the exchange rate. For example, the average cost during June 2002 of one Australian dollar was 0.57 United States dollars, 0.38 United Kingdom pounds and 70.29 Japanese yen. Therefore, the exchange rate can be used as a measure of a currency's value.
Exchange rates vary over time. When the exchange rate for the Australian dollar against another currency rises (appreciates), it buys more of the foreign currency.
Exchange markets facilitate world trade by providing markets in which to clear the proceeds of that trading. When selling goods and services abroad, Australian residents often receive foreign currencies and will purchase foreign currencies when making payment for imports of goods and services. Exchange markets also enable the risks associated with holding currencies to be traded.
The value of the exchange rate affects the amounts that Australia receives for its exports and pays for its imports, as most exports and imports are denominated in foreign currencies. Generally when the exchange rate for a country's currency appreciates, the price residents pay for imports declines, while for non-residents our exports become more expensive. Alternatively, a currency depreciation will cause the price of imports into Australia to rise and lower the international price of our exports. These changes can affect the demand for imports and exports. Income payments on Australia's foreign assets and liabilities denominated in Australian dollars are also affected by exchange rate movements, as are the repayments on these assets and liabilities. Because of these effects, exchange rates have an important bearing on the balance of payments.