Australia's Economy
Floating the Australian Dollar
How Australia floated its currency in December 1983, and how a flexible exchange rate has acted as a shock absorber during commodity booms and busts.
In December 1983, Australia floated its dollar.
Before
The Australian dollar was fixed or managed, with capital controls.
Why float
- Managing the rate was becoming impossible with growing capital flows.
- A float allowed independent monetary policy.
A commodity currency
The Australian dollar tends to rise when commodity prices rise and fall when they fall.
Shock absorber
- When commodity prices drop, the currency falls, making Australian exports cheaper and softening the blow.
- During the 1997 Asian crisis and 2008, the falling dollar helped.
Swings
- The dollar fell below 50 US cents in 2001.
- It rose above 1 US dollar in 2011 during the mining boom.
Lesson
Flexible exchange rates can help commodity exporters adjust to shocks.
The falling dollar
When iron ore prices fell, the Australian dollar weakened, making Australian wine and tourism cheaper for foreigners and cushioning the economy.
Thinking a falling currency is always bad
For Australia, it has cushioned commodity shocks.
Key takeaways
- Australia floated its dollar in December 1983.
- It's a commodity currency tracking resource prices.
- The float acts as a shock absorber.
- The dollar swung from under 50 cents to above 1 US dollar.
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