Direct Intervention (dirtying the float)
- large short-term volatility in the exchange rate is harmful to the domestic economy
- often caused by excessive speculation
- The RBA buys/sells foreign exchange when the AUD goes either too high or too low
- ability to intervene through buying A$ is limited by the size of its foreign currency holdings
Indirect Intervention (Monetary policy decisions)
- the RBA sets interest rates to manage the economy (a Monetary policy)
- → changes the interest rate difference between Australia and overseas (the interest rate differential)