All trade and financial relationships between countries are mediated through the exchange of currencies.
Australia’s floating exchange rate system
A Floating exchange rate is :: when the value of an economy’s currency is determined by the forces of demand and supply in foreign exchange markets.
factors affecting a floating exchange rate (in 2011):
interest rates
→ expectations of forex dealers
Note:ForEx dealers buying/saving their money in foreign currencies is recorded as a ==portfolio investment== on the Current account
demand for exports (commodities)
Trade Weighted Index (TWI)
The Trade Weighted Index (TWI) is :: a measure of the average value of the AUD compared to Australia’s major trading partners currencies, weighted according to their significance to Australia’s trade flows.
more effective than just comparing the AUD with the USD
There are some limitations of the TWI
weighed according to volumes of trade, regardless of the currency in which the trade is invoiced (paid for) in