12 December 2023 commemorates the 40th anniversary of the Australian dollar —an event that signifies a remarkable juncture in the nation’s economic evolution. Presently, the Australian dollar (AUD) holds a value of approximately 66 U.S. cents, marking a trajectory that has evolved since the historic decision on the 12th of December 1983. Prior to this pivotal moment, the Australian currency was linked to the collective fortunes of the U.S. dollar, the British Pound, and gold.
On that consequential Monday in 1983, the narrative shifted. The Australian dollar emerged from the constraints of a ‘pegged’ system, embracing the dynamic realm of a ‘flexible’ exchange rate regime. Subsequently, its value became subject to the intricate forces of demand and supply in the global currency markets. Oscillating between highs of 1.1080 and lows of 0.4773, the AUD has been a testament to Australia’s identity as a small and open economy.
While foreign exchange rates may occupy the thoughts of the average Australian primarily during overseas travel planning, the Australian dollar has played a significant role in the nation’s economic narrative over the past four decades. This prompts a crucial question: How do the fluctuations of the Australian dollar impact the daily lives of ordinary Australians?
The value of the Australian dollar, intricately tied to demand and supply dynamics, is influenced by various factors. Tastes and preferences come to the forefront, as the global acclaim of Australian goods and services generates demand for the Australian dollar. The second factor involves relative price levels; a depreciating Australian dollar renders local products more competitively priced on the global stage. The third factor introduces the complexities of interest rates and inflation, where investors seek the highest real interest rates, adding depth to the currency landscape. The final factor, income levels, introduces a counterintuitive dynamic— if Australian incomes outpace others, an influx of Australian dollars into the market may lead to potential depreciation.
But how do these market intricacies impact the lives of everyday Australians?
When the Australian dollar weakens against foreign currencies, a nuanced scenario unfolds. Exporters benefit as Australian goods become more competitively priced globally, stimulating the economy. However, imports become more expensive, contributing to inflation. Asset markets experience tremors, becoming more appealing to global investors. For Australians traveling abroad, a weaker currency translates to increased costs in Australian dollar terms.
Conversely, a strengthening Australian dollar reshapes the economic landscape. Imported goods become more affordable, easing inflationary pressures. On the flip side, exporters face challenges as their products become less competitive globally. International travellers, however, enjoy the advantage of stretching their Australian dollars further.
The 40-year journey of the floating Australian dollar has heralded an era of economic adaptability and resilience. The audacious decision by the Hawke-Keating government has enabled the currency to navigate global economic currents, fostering a dynamic and competitive environment. As the Australian dollar continues its fluctuations, it stands as a testament to the nation’s dedication to sound economic policies, transcending political boundaries and fortifying Australia’s ability to thrive amid the ever-shifting global landscape. In the future, the floating exchange rate system is poised to guide Australia toward sustained economic growth and stability, ensuring its continued prominence on the world stage.
Dr Robert Bianchi is Professor of Finance at Griffith University. He is the Director of the Griffith Centre for Personal Finance and Superannuation (GCPFS). Robert’s research expertise is in the areas of asset allocation, superannuation/retirement, investments and alternative assets (commodities and infrastructure). He has collaborated in research projects with partners including the CSIRO, Australian Research Council (ARC), Asian Development Bank (ADB), EDHECinfra (Singapore) and the Indonesian government.
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