Aussie Dollar Hit by Interest Rate Talk The Australian dollar fell against the U.S. dollar to its lowest value in the past two weeks. The CPI inflation rate was reported to be generally as expected but not high enough to justify previous expectations for an aggressive interest rate rise by Australia’s central bank next week.

Source: Reuters, October 28, 2009

a. What is Australia’s exchange rate policy? Explain why expectations about the Australian interest rate lowered the value of the Australian dollar against the U.S. dollar.

b. To avoid the fall in the value of the Australian dollar against the U.S. dollar, what action could the central bank of Australia have taken?

Would such an action signal a change in Australia’s exchange rate policy?