What does the statement below mean when it says the Australian dollar was floated?
Between 1983 and 1996, the Hawke–Keating Labor governments introduced a number of economic reforms, such as deregulating the banking system and floating the Australian dollar.
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What this means is that the value of the Australian dollar was allowed to change relative to other currencies. Before that, the government had maintained a fixed value for the dollar in foreign exchange.
When a currency is "floated," its value is allowed to vary with supply and demand. When China, for example, wants to buy minerals from Australia, it must obtain Australian dollars to pay for those minerals. When Australia wants to buy goods from China, it must pay Australian dollars in order to get yuan. The first of these raises the demand for Australian dollars while the second increases the supply of those dollars. When demand for a currency increases, the value of the currency increases. When its supply increases, its value declines.
So, what Hawke did was to allow the forces of supply and demand to determine the value of the Australian dollar.
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