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A generation of an internationalised Australian dollar¹
1.
Introduction
When the Bretton Woods system collapsed in the early 1970s, Australia, unlike many other
developed economies, did not move immediately to a floating exchange rate. Rather, exchange rate policy in Australia moved through several regimes, gradually providing an additional degree of flexibility in the exchange rate. Reforms did not always follow a preset plan but were often a response to external forces exposing deficiencies in the prevailing system.
Eventually, in 1983, the currency was floated and capital controls were dismantled. These were the core reforms that led to the "internationalisation" of the Australian dollar. However, the transition was facilitated by other reforms in Australian financial markets, including, very
importantly, the development of an active local bond market and a non-deliverable forward currency market. Ric Battellino and Michael Plumb³ It is now 25 years since the Australian dollar was floated. In that time, it has become widely
accepted that the Australian economy has benefited greatly from an internationalised
currency.
reserve bank of australia exchange rates
The floating exchange rate has acted as a buffer to external shocks, particularly shifts in the terms of trade, which, in Australia's case, can be very substantial. It has allowed
the economy to absorb these shocks without the large inflationary or deflationary pressures that tended to result under the previous fixed or managed exchange rate regimes. This has
been well demonstrated on a number of occasions, including during recent events in global financial markets.
This paper begins with a brief overview of Australia's move from a fixed to a floating
exchange rate and the abolition of capital controls, and provides some information on the extent to which the Australian dollar is now internationalised. It then discusses the implications of this for financial markets, the conduct of monetary policy, the balance of payments and financial stability.
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| australian bank exchange rate current cash rate au |
australian bank exchange rate 2023
2. Australian dollar internationalisation: a historical perspective As noted, exchange rate policy in Australia moved through several regimes during the decade or so before the currency was floated. The first major change occurred in 1971, when
exchange rate policy shifted from pegging to the British pound to pegging to the US dollar.
This was followed by a peg to a trade-weighted exchange rate index and then by a crawling peg against the same index. While the pegs meant there were long periods when the currency did not move, these were interrupted by occasional realignments in response to
This paper draws heavily on Debelle and Plumb (2006). The authors would also like to thank Patrick D'Arcy,
Crystal Ossolinski and Sophia Davis for their assistance. Deputy Governor, Reserve Bank of Australia.
3 Head of Prices, Wages & Labour Market, Reserve Bank of Australia.
current cash rate au 2023
*For a more detailed discussion, see Debelle and Plumb (2006).
balance of payments and monetary pressures. The realignments invariably caused a good deal of turmoil in markets and theeconomy more generally.
The Australian dollar was eventually floated in 1983. In essence, the float meant that:
banks were no longer required to clear their spot foreign exchange positions with the Reserve Bank each day;
the Reserve Bank ceased announcing an indicative midrate for the Australian dollar
against the US dollar; and exchange controls were removed.
GBP
0.8
0.6
04
USD
1.3
1.0
0.7
Index
130
100
70
40
reserve bank of australia foreign exchange rates
Figure 1
Australian Dollar
Peg to GBP
Monthly
AUD GBP
AUD/USD
Pag to USD
y
Trade-Weighted index"
ALTW
2
crawing pag
Float
GBP
0.8
1979
May
current cash rate australia 2023
Sources: Global Financial Data RBA Thomson Res
06
USD
1.3
1.0
0.7
130
BIS Papers No 61
100
70
At various stages in the pre-float era, the exchange rate was used as an instrument to achieve the goals of internal or external balance. At times, the conflict between those goals was the catalyst forcing change in the exchange rate regime. A recurring problem was that, with Australian markets becoming increasingly integrated into world markets, large international capital flows were making it difficult for the authorities to control domestic
monetary conditions. The eventual decision to float the currency was made not because the authorities had exhausted foreign exchange reserves, as is often the case in emerging market economies, but because the country was facing large inflows of capital that were
undermining monetary control.
Other factors, besides mounting capital flows, also posed challenges to prevailing exchange
rate arrangements in the years leading up to the float. At various points, financial markets in
Australia developed ways to circumvent the regulatory framework. A good example was the
formation of the so-called foreign currency hedge market in the mid-1970s, established
entirely by private sector market participants, which operated alongside the physical foreign
exchange market but was outside the direct control of the authorities. This was a non-
deliverable forward market that began as a means of managing exchange rate risk, given the
extremely limited forward exchange facilities offered by the Reserve Bank of Australia. The
market was onshore, with settlement of contracts taking place in Australian dollars. There
was no exchange of foreign currency, and so the forward cover was achieved without
violation of existing exchange controls. The authorities were aware of the formation of this
market, but chose not to interfere with its development. In the event, as this market allowed
banks and corporations to develop their currency trading skills, it helped in the relatively
smooth transition from a managed to a floating exchange rate.
3. How internationalised is the Australian dollar?
Kenen (2009) identifies a number of conditions for classifying a currency as internationalised,
including:
cash rate australia now 2023
The floating of the Australian dollar and the removal of capital controls meant that the
Australian dollar satisfied the first condition. With no restrictions on domestic and foreign
entities transacting in the currency, turnover in the Australian dollar increased sharply in the
years following the float. the Australian dollar is the sixth most traded currency
globally, while AUD/USD is the fourth most traded currency pair. As another sign of
internationalisation, more than half of turnover takes place in offshore markets (that is,
between non-residents). As noted by McCauley (2006), this is true for most major currencies.
A notable exception is the pound sterling, reflecting the financial centre status of London
(Table 1).
4
no restrictions on domestic or foreign entities transacting in the currency, in both
spot and forward markets; and
foreign entities being able to hold and issue financial instruments denominated in
the currency, both in the domestic market and in offshore markets.
204
See Debelle et al (2006) for more detail.
See BIS (2007).
US dollar
Euro
Table 1
reserve bank of australia foreign exchange rates
Global foreign exchange trading
Average daily turnover of spot, outright forwards and foreign exchange swaps
in billions of US dollars in April 2007
Japanese yen
Pound sterling
Swiss franc
Australian dollar
Canadian dollar
Swedish krona
Hong Kong dollar
Norwegian krone
New Zealand dollar
Mexican peso
Singapore dollar
Korean won
South African rand
Danish Krone
Russian rouble
Polish zloty
Indian rupee
Chinese renminbi
New Taiwan dollar
Brazilian real
Hungarian forint
Czech koruna
Thai baht
Turkish lira
Philippine peso
Global trading
Offshore
trading
australia cash rate now 2023
BIS Papers No 61
Domestic trading includes both onshore-onshore and onshore-offshore trading.
Source: BIS (2007), Tables E.1 and E.7.
Memo:
Offshore
percentage
The Australian dollar also readily qualifies as internationalised on the second condition -
ie non-resident participation in Australian dollar financial instruments. This takes several
forms: non-residents holding domestically issued bonds; non-residents issuing Australian
