Yahoo Finance The Australian dollar explained: More than just a coin
The Aussie dollar has been sneaking its way into news headlines quite a bit in the past week, showing signs of strength despite the war in Ukraine and eye-watering petrol prices.
“Why has Ukraine boosted the Aussie dollar?” “Commodities rule the roost for AUD”. “Skyrocketing commodity prices lift Australian dollar”. “Australian dollar robust post GDP amid war risks”.
When measured against the US dollar - the most common method for estimating the Aussie dollar’s relative strength or weakness - AUD recently rose to four-month highs, reaching just shy of 74 US cents.
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Credit Suisse analysts reckon the AUD’s resilience, despite the backdrop of Russia’s invasion of Ukraine, relates to Australia’s commodity strength - oil and gas supply challenges are driving up iron ore prices.
So what else is there to know about the Australian dollar?
More than just a (not so) gold coin
The first thing to know about the physical Australian dollar is that it’s not gold at all - it’s an alloy of 92 per cent copper, 6 per cent aluminium and 2 per cent nickel.
It was founded - as a note - in 1966, when we ditched the British pound, and was floated on foreign exchange markets in 1983.
Prior to being floated, the value of our dollar was pegged tightly to other currencies, at first the pound, then the US dollar, then a basket of selected currencies.
In 1983, seeking widespread deregulation, the Labor government - with Paul Keating as treasurer - floated the dollar, meaning it was now valued through the supply and demand of money within world currency markets.
Today, despite the tyranny of distance and Australia’s tiny size relative to other countries, the AUD is the fifth most-traded currency in the world, behind the US dollar, the Euro, the British pound and the Japanese yen.
It is also a ‘reserve’ currency, which means many countries hold substantial amounts of it due to its popularity as a traded currency.
What drives it?
It is generally accepted among economists that commodity prices, like iron ore, copper and gold, drive the value of the Aussie dollar.
This makes sense because of Australia’s reputation as one of the world’s most sound mining jurisdictions; not only is Australia a huge exporter of coal, iron ore and precious metals, but it is generally seen as a ‘friendly’ place to mine, thanks to strong regulatory frameworks and geopolitical stability.
What this does mean, however, is that the dollar’s value can fluctuate - it rallies when global demand for minerals and agricultural products is high, but drops when it falls, as was the case in 2001.
This is part of what makes the AUD attractive, however; other reserve currencies generally rise during market slumps as investors take their money away from stocks.
Fluctuating value for consumers
These days, although it remains valued through the supply and demand of money within world currency markets, the most common way to assess the value of the AUD is through the US dollar.
Prior to the float, the AUD’s highest-ever value was in the mid-70s, when one Aussie dollar would buy you about US$1.48.
Since floating, the AUD has fluctuated between less than 50 US cents to highs of US$1.11 in 2011, in the wake of the mining boom.
In about 2001, it fell to lows of 47c (much to the chagrin of your author; a huge U2 fan. U2 declined to tour Australia that year because of the weakness of the AUD).
Over the past five years however, it has remained relatively steady between about 68c and 80c (aside from a dive to 60c when all markets crashed due to COVID-19).
All of this basically means that when the Aussie dollar is ‘strong’, your money goes further overseas. When it is ‘weak’, everything you purchase over international waters gets more expensive.
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