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The Australian dollar is currently the sixth-most-traded currency in the world foreign exchange markets behind the US dollar, the euro, the yen, the pound sterling, and the Swiss franc, (accounting in 2007). The Australian dollar is popular with currency traders due to 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. The Australian dollar (sign: $; code: AUD) is the currency of the Commonwealth of Australia, including Christmas Island, Cocos (Keeling) Islands, and Norfolk Island, as well as the independent Pacific Island states of Kiribati, Nauru and Tuvalu. Within Australia it is almost always abbreviated with the dollar sign ($), with A$ or AU$ sometimes used informally to distinguish it from other dollar-denominated currencies. The dollar was introduced on 14 February 1966, replacing the Australian pound (distinct from the pound sterling since 1931) with a decimal currency. The initial rate of conversion was two dollars per pound, or ten shillings per dollar. Its exchange rate was pegged to the sterling at a rate of 1 dollar = 8 shillings (2.50 dollars = 1 pound). In 1967, Australia effectively left the sterling era. When the sterling was devalued in 1967 against the U.S. dollar, the Australian dollar did not follow. It maintained its peg to the U.S. dollar at the same rate of 1 Australian dollar = 1.12 U.S. dollars. 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. On 8 December 1983, the Australian dollar was floated, allowing its value to fluctuate dependent on supply and demand on international money markets. Australia maintained a fixed exchange rate between the Australian and British pounds, initially at par, and later at 0.8 GBP (16 shillings sterling). 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 the 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 valuated 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. The TWI valuation was changed in November 1976 to a periodically adjusted valuation. On 9 December 1983, the Australian Labor government led by Prime Minister Bob Hawke and Treasurer Paul Keating floated the Australian dollar, and the exchange rate of the Australian dollar reflected the balance of payments. The terms of trade does not determine the value of the dollar but it is a major component of the balance of payments. 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. ----------- |
