Australian Dollar

December 30, 2006 on 4:46 pm | In Australian Dollar, Resources | Add Your Comment

The Australian dollar is the official currency of the Commonwealth of Australia since 1966. The currency is commonly abbreviated with the dollar sign “$”. Other notations used to distinguish the Australian dollar from other currencies are $A or A$, $AU or AU$ and its official ISO currency code is AUD. To locals and currency traders the currency is commonly referred to as simply “the Aussie” or “the Aussie Dollar“. The denomination is divided into 100 cents. The currency itself is the sixth most traded currency in the world foreign exchange markets (aka “forex markets”) behind the US dollar, Euro, Yen, Pound Sterling and the Swiss franc. According to Wikipedia, the Aussie is popular with forex traders because of “the relative lack of government intervention in the foreign exchange market, the general stability of the economy and government as well as the prevailing view that it offers diversification benefits in a portfolio containing the major world currencies (especially because of its greater exposure to Asian economies and the commodities cycle).”

Australian Dollar History

The Australian dollar made its debut on Valentine’s day 1966 (14th February 1966) when the currency replaced the Australian pound and also introducing the decimal system. One pound was equivalent to two Aussie dollars or ten shillings per dollar. The Australian dollar was at that time worth 980 milligrams of gold. (As at December 2006 the Australian dollar was worth 38 milligrams of gold.) From 1946 to 1971 Australia maintained a peg to the U.S. dollar under the Bretton Woods system, but it was effectively pegged to sterling until 1967. In 1967 the sterling devalued against the US dollar, there the Australian dollar remained pegged to the US dollar. With the breakdown of the Bretton Woods system in 1971, Australia converted the mostly-fixed peg to a moving peg against the U.S. dollar. In September 1974 Australia moved to a peg against a basket of currencies called the TWI (trade weighted index) in an effort to reduce fluctuations associated with its peg to the U.S. dollar. The peg to the TWI was changed to a moving peg in November 1976, causing the actual value of the peg to be periodically adjusted. In December 1983, the Australian dollar was deregulated and cut free (”floated” the Australian dollar) from its US dollar peg at 90 cents per US dollar.

So when the Australian dollar floated in 1983 it started life at 90 cents. In 1986 to 1989 the dollar was in the range of rising from 59 cents to 89 cents. In 2001 the dollar fell to all time lows of 48 cents. In 2003 the currency had recovered back to 73 cents. Now as we close 2006, we are seeing the Australian dollar rallying against the US dollar back up to the 79 cents level, with experts betting on a 80 cent level in the next six months.

Australian Dollar Behaviour

Ever since the Australian dollar was floated, the currency rises when times are good, especially when global economic times are good. The currency falls when the global economy is weak and the domestic economy is weak. It is also wise to note that when the dollar falls, it supports exporters, which supports the Australian economy. The dollar reflects Australia’s reliance upon commodity exports such as mineral and farming industry produce - rising as mineral prices rise and falling upon mineral price slumps, strong domestic spending (high imports) or weak export earnings outlook. The currency is attractive to traders because of its high volatility, currency exposure and the interest swap rate.

The Australian Dollar is known around trading circles as a “Commodity Currency” like the Canadian Dollar. The dollars’ fortunes are heavily dependent on the prices of Gold, Copper, Nickel, Coal and Wool. Movements in the Australian Dollar (the Aussie) are also dependent on movements in the Japanese Yen, with the two currencies tending to move in tandem. Generally, a stronger Yen has implied a stronger Aussie and a weaker Yen has been followed by a weaker Aussie.