RDP 9010: Volatility of the Australian Dollar Exchange Rate 6. Conclusion

The results show that while the move to the float has unambiguously increased the volatility of the Australian dollar, its bilateral exchange rate against the US dollar has not been more volatile than those of the major currencies. Furthermore, the Australian dollar, in general, has not been excessively volatile compared with other asset prices. A comparison of effective exchange rates for different countries shows that the Australian dollar has been more volatile. However, this may reflect relatively low covariation between the Australian dollar and the component currencies of the trade-weighted index.

The paper has also shown that the increase in volatility of the Australian dollar exchange rate in the post-float period has been associated with a reduction in interest rate volatility in Australia. Under a floating exchange rate regime, the burden of adjustment resulting from external shocks has shifted from foreign exchange reserves and short-term domestic interest rates to the exchange rate. While domestic factors may explain some of the volatility around the middle of the decade, the results show that other currencies were also relatively volatile during this time.