An exchange rate is the ratio at which a country's currency exchanges for the currency of another country. Exchange rates are typically expressed as the foreign currency equivalent of one unit of domestic currency. The exchange rate between Australia and the United States for example was $A1.00 = $US0. , (as of 2.12.99). The exchange rate is determined by the demand for, and supply of, that currency in terms of other currencies.

The major trading countries of the world use a system of floating exchange rates. Under this system, exchange rates are determined by the free market forces of supply and demand. In other words, the rate moves freely in response to competitive market forces. Demand and supply are determined in terms of overseas currencies. Those who have foreign currency and want to buy dollars with it provide the demand for Australian dollars. These include overseas people who want to buy our exports, tourists coming here, overseas people wanting to lend money here, or buy shares or property here, overseas firms setting up branches here or expanding them, and those who pay us for various services, such as repay

Speculation on foreign exchange markets occurs when currencies are bought and sold for the sole purpose of making a profit. Most speculation is based on expectations regarding the relative movements of exchange rates. Speculators base their forecasts on anything that affects the value of currencies - the performance of the current account, the signing of trade agreements, government economic policy decisions, political events, rumours, wars, and so on. This too make appreciate or depreciate Australia's currency.

There are a number of factors influencing the demand for Australia's exports. Relative inflation rates are just one factor. To be competitive on international markets, a country's exports must be at least as cheap as the same goods and services supplied by producers in other nations. Any change in domestic prices relative to those in other countries will alter the international competitiveness of local industries. If Australia experiences high inflation rates relative to other nations, exports will become more expensive and therefore less competitive. A currency depreciation occurs as the demand for the Australian dollar falls. An appreciation of Australia's currency, will occur similarly if Australia has low inflation rates in comparison to other countries..

Capital outflow from Australia increases the supply of Australian dollars on foreign exchange markets as investors sell our currency to obtain the currency of the host nation. Any increase in capital outflow adds to the supply of Australian dollars, causing a currency depreciation, while a decrease in the level of capital outflow reduces the supply of Australian dollars and leads to a currency appreciation.

Australia is host to much foreign invest

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