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 loans. Those who have Australian dollars and want to use them to buy foreign currencies provide the supply of Australia dollars. These include Australians who want to buy imports from overseas, Australian tourists going overseas, Australian banks and firms lending or investing money overseas, and Australians paying for various services from overseas, repaying loans and paying interest on loans. 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 ...
