My guess is the same exchange rate that you use for the rental income. The ATO website has details on when to use which exchange rates, but for a regularly recurring payment (like rent or depreciation) you can either use daily, weekly, monthly rates, or an average over the year, which you can find on the ATO website.
As of 2008, you can offset losses incurred on overseas property against Australian income. Have a look here.
I can't work out why the Govt changed the rules, as unlike normal negative gearing, they get no stamp duty, land tax, CGT or tax on the profits made by banks. For all the above reasons, normal negative gearing makes sense to the govt here, but not on overseas property. But there must be some good reason that I can't think of.
...the changes coming into effect on 1 July 2008 will undoubtedly have a positive effect on Australia’s desire to become a regional centre for multinational companies. The abolition of quarantining rules will relieve companies with foreign sourced income from tracking and collecting different classes of income, deductions and taxes. The Explanatory Memorandum of the amending Bill stated that the new rules will improve the relative attractiveness of Australia as a destination for international capital. The regional headquarters of a foreign group will not be compelled to maintain costly systems in order to comply with the quarantining rules.