Exchange rate is the price of one national currency, such as the Fijian dollar, expressed in terms of another currency, for example, the US dollar.

Exchange rate regimes (or systems) are the framework under which that price is determined.

An exchange rate regime is a system that a country’s monetary authority – usually the reserve bank, adopts to establish the exchange rate of its own currency against other currencies.

There are generally two types of exchange rate regimes: Fixed, also known as Pegged system and Floating or Flexible regimes, and countries are free to adopt the exchange rate system which they consider more optimal.

In a floating exchange rate system, exchange rate values are determined by the market forces of demand and supply and as such the exchange rate adjusts on a continual basis.

In a fixed system, exchange rates are either held constant or allowed to fluctuate only within very narrow boundaries.

In this system of currency pricing, the Reserve Banks play an integral role in maintaining a currency’s value.

Fiji has a fixed exchange rate regime where the Fiji dollar (FJD) is pegged to a trade weighted basket of currencies comprising the Australian dollar (AUD), New Zealand dollar (NZD), United States dollar (USD), Japanese Yen (JPY) and Euro (EUR).

The weight of each currency in the basket is determined by its importance to Fiji’s trade in goods and services.

When the value of the Fiji dollar increases relative to other currencies, we say that the Fiji dollar has

strengthened or appreciated.

Alternatively, when the value of our dollar declines, we say that the Fiji dollar has weakened or depreciated against other currencies.

Movements in the Fiji dollar reflect the movements in the major currencies in our basket in the international currency market.

Let us look at how over the year our Fiji dollar traded against the basket of currencies it is pegged to, on a Simple Moving Average basis.

US Dollar

Generally, the US dollar appreciated strongly in the final quarter of 2016, but took a declining trend against most currencies since the start of 2017.

The emerging currencies gained strong footing against US dollar’s bout of weakness which was of course due to a variety of factors.

In what seemed to be an eventful year for the US, the macro-economic factors as well as the geopolitical tension together with Federal Reserve’s rate hike decisions had been the driving factors for the US dollar performance.

Our Fiji dollar had gained a bit of impetus against the US dollar from mid to the third quarter of the year.

However, the strong hold was short lived as the US dollar gained support from the proposed tax reforms by the Trump Administration and the Federal Reserve’s rate hikes towards the end of the year.

On the Simple Moving

Average basis, our Fiji dollar strengthened by 1.19 per cent against the US dollar when compared to 2016.

The Australian dollar traded in close ranges throughout the year mainly affected by changes in expectations for monetary policy in Australia and the United States.

However, strong macro-economic data and the generally positive sentiment for the Australian economy added to the strengthening momentum of the Aussie dollar in the third quarter before its gradual weakening towards the end of the year.

On average, our Fiji dollar weakened by 1.55 per cent against Ausie dollar compared to 2016.

Low global interest rates, and the positive outlook for the New Zealand economy relative to several other advanced economies, have reinforced investor confidence for New Zealand dollar assets over recent past, and so contributed to the average strengthening of New Zealand dollar exchange rate.

The post-election period saw investors aggressively reposition their NZD stakes.

The strengthening of Kiwi was also partly driven by overall weakening of the US dollar.

Compared to 2016, on average, our Fiji dollar weakened by 0.78 per cent against the Kiwi.

JPY and EURO

On an annual Moving Average basis, the Fiji dollar largely appreciated against the Japanese Yen. Compared to 2016, our Fiji dollar strengthened by 4.83 per cent against the Japanese Yen.

The weakening trend of JPY was largely owing to their disappointing economic growth and inflation rate which was much slower than expected.

For the European economy, inflation has been slow in converging towards the European Central Bank (ECB)’s target rate and as the political turmoil in a number of Eurozone countries continues, so does investor uncertainty.

However, the accelerating growth in the region and a steadily declining unemployment rate with manufacturing PMIs at seven-year highs have been providing the required support to the Euro.

As such, on a moving average basis, our Fiji dollar weakened by 0.11 per cent against the Euro.

The strengthening local currency means good news for our local importers as they have to pay less Fiji dollar for their foreign currency priced invoices or receive a bit more foreign currency notes against Fiji dollar when travelling abroad.

Conversely, a strong local currency is not really favourable to those receiving overseas inward remittances from their friends or relatives abroad.

Also, stronger Fiji dollar would make our exports become expensive to the overseas buyers and hence may hurt the competitiveness of our export commodities in international markets.

For an open economy like ours, which is heavily dependent on trade, the external value of the currency is particularly relevant as it affects, among other things, the prices and the volume of goods and services we export and import.

Because Fiji pegs its exchange rate to a basket of currencies, there are simultaneous upward and downward movements in the value of the Fiji dollar in the short term. As we strengthen against one currency, we also weaken against others.

However, over the long term, our currency has remained relatively stable against the currency basket.

Feedback:  monica.aguilar@fijisun.com.fj