Mr Hockey's appointment comes after he left politics following his removal as treasurer by Malcolm Turnbull.
He had been seen as a close ally of Tony Abbott who was ousted as PM by Mr Turnbull in a party vote in September.
Mr Turnbull said Mr Hockey was "a great Australian, he is one of the most engaging, persuasive people I've known in public life".
"He's held very high office, he's got great contacts in the United States, he's a passionate patriot," he told Australian media.
Announcing the appointment, Foreign Minister Julie Bishop said Australia's relationship with the United States was the "bedrock of foreign and defence policy".
Some in the Labor opposition questioned the move, citing Mr Turnbull's role in ousting Mr Abbott and Mr Hockey's departure from politics.
"This is a very important posting for Australia and should be done by someone with a deep interest for foreign affairs," said deputy opposition leader Tanya Plibersek.
"There is no doubt this is a captain's pick by Malcolm Turnbull," she told ABC television.
Kim Beazley, who has has been Australia's ambassador to the United States since 2010, will be replaced by Mr Hockey in January.
Australia's former treasurer Joe Hockey has been named as the new ambassador to the United States.