FIXED EXCHANGE

RATES
WHAT IS IT? WHAT IS IT?

This could be done daily or left for

A foxed exchange rate means that
the Reserve Bank announced what
the value of the Australian currency
would be compared to other
currencies.
longer periods for formal
announcements of changes in the
currency. If the officially lowered the
value of the fixed exchange rate that
was a devaluation of the currency. If
the value was increased it was a
revaluation of the currency.

WHO HAS IT WHAT HAPPENS

With a fixed exchange rate
Many Asian and the basic value of the currency
South American is still determined by the
demand and supply of the
countries have
currency. When a government
fixed exchange
or central bank artificially fixes
rates or have the currency there will be a
them loosely or balance of payments surplus
tightly pegged to or deficit. If the currency is
the $US. overvalued at $1.50 US, there
would be a B of P deficit.

WHAT HAPPENS AUSTRALIA

If there is a BoP deficit more money is leaving the
country than is coming in. This will run down the
international reserves. When these get too low the
country will have to devalue the currency or go
bankrupt. If the currency is fixed too low it will have a
B of P surplus. While this increases Foreign Reserves,
it does not purchase goods and services.
Prior to 1983, Australia had a fixed exchange
rate. Movements in the Australian dollar
have been highly correlated with
movements in US equities at different
points in time over the past decade.