RDP 9010: Volatility of the Australian Dollar Exchange Rate 1. Introduction

Participants and observers of the foreign exchange market question from time to time whether the Australian dollar has been particularly volatile since it was floated in December 1983. Some have suggested that the Reserve Bank might play a greater role in smoothing the dollar's path during periods of excessive fluctuation.

While the Australian dollar has at times fluctuated widely, it is not obvious that movements have been “excessive”. This paper examines the volatility of the Australian dollar in both the period immediately prior to the floating of the exchange rate and in the six years thereafter. In particular, it uses two measures to compare the volatility of the Australian dollar with the volatility of other currencies and some domestic asset prices. Section 2 discusses methodology, Section 3 details the results and Sections 4 and 5 evaluate the outcome.