Australia has adopted a floating system of exchange rate after the deregulation in December 1983. Australia's exchange rate is thus determined by the free market forces of demand and supply which fluctuate over time. Factors affecting the demand and supply of Australian dollars therefore affect the exchange rate. Any changes in these factors lead to movements of the exchange rate causing significant positive or negative impacts on the Australian economy.

The Australian dollar fluctuates due to a number of factors including market forces and government intervention. Market forces influencing exchange rates include profit opportunities and interest rate levels, commodity prices and trade results, speculators and world economic conditions. The demand and supply of AUD changes with these factors. The exchange rate is determined by the equilibrium between the amount demanded and the amount supplied, as shown in the graph. Hence changes in the demand and supply of AUD will...