A floating exchange rate is one set by supply and demand in the market rather than fixed by a government or central bank. The Australian dollar has floated since December 1983, so its value moves continuously with trade flows, interest-rate expectations and global sentiment.
Under a float, no institution promises to hold the currency at any particular level. The price at any moment is simply where buyers and sellers meet, which is why the Australian dollar can move meaningfully within a single day on economic news from Australia, the United States or China.
Floating the dollar was one of the defining reforms of the Australian economy. It lets the exchange rate act as a shock absorber: when commodity prices fall or global conditions deteriorate, the currency can weaken and cushion the economy, rather than forcing the adjustment through interest rates and reserves.
One contract, valued at two exchange rates, shows the mechanism. Take a cargo priced at 650,000 US dollars. At 0.65, meaning one Australian dollar buys 65 US cents, that converts to 1,000,000 Australian dollars. Let the currency fall to 0.60 and the same US dollar contract converts to 1,083,333 Australian dollars, 8.3 per cent more, with no change to the price either party agreed. Reserve Bank governor Glenn Stevens marked thirty years of the float on 21 November 2013. He said of the exchange rate: ‘It has acted as a shock-absorber, as intended, but it has also served as a disciplining constraint at times.’ The sum above is the absorbing half, read as the exporter receiving those US dollars. Read as the importer paying them, the identical 8.3 per cent is the constraint.
The Reserve Bank of Australia retains the ability to intervene in the market, but intervention has been rare; the working assumption behind every figure on Tradergy is a market-determined price.
Longer read: What happened when the Australian dollar was floated. The decision was taken on a Friday afternoon and took effect the following Monday. What it replaced, what the Reserve Bank expected of itself afterwards, and how rarely it has stepped in since.
For the live side of this definition, head to the Australian economy pages.
Related terms
Currency peg · Currency appreciation · Trade-weighted index (TWI) · All terms
Primary authority: RBA explainer: exchange rates. Definition reviewed against the authority’s published material; this page is reference information, not advice.
Common questions
Who decides the value of the Australian dollar?
No one does directly. Since the 1983 float, the value is set continuously by the foreign-exchange market as participants trade. The Reserve Bank of Australia can intervene in exceptional circumstances but does not target a level for the currency.
Why do floating currencies move so much?
Because the price adjusts to news in real time. Interest-rate expectations, commodity prices, and global risk appetite all shift constantly, and a floating rate absorbs those shifts immediately rather than storing them up the way a fixed rate does.
Has the Australian dollar always floated?
No. Before December 1983 the currency was pegged or managed, first against the British pound, later the US dollar and a trade-weighted basket. The float ended that arrangement and let the market set the price, which it has done ever since.