The Australian dollar, abbreviated as AUD, is the country’s official currency. Several regions, including Norfolk Island, Christmas Island, and the Keeling Islands, use it as their official currency.
Three sovereign Pacific Island states Nauru, Kiribati, and Tuvalu – utilize it as their official currency.
The Reserve Bank of Australia (RBA), Australia’s central bank, manages AUD and sets the country’s monetary policy, as well as issuing and controlling the money supply. The Australian dollar replaced the Australian pound on February 14, 1966, at a conversion rate of 2 AUD per Australian pound.
The Australian Dollar’s History
The Australian pound was the country’s currency until 1966, when the Australian dollar was introduced. The Australian money was divided into 20 shillings, which were further divided into 12 pence, similar to the British pound. The Australian pound was first circulated in 1910 at the same rate as the pound sterling.
Following a currency depreciation in 1931, its value diverged from that of the pound sterling.
In 1902, a House of Representatives special committee led by George Edwards advocated that Australia adopt a decimal currency based on the florin. In 1937, the Banking Royal Commission recommended that Australia adopt a decimal coinage scheme.
The Decimal Currency Committee stated in August 1960 that it supported decimalization and advocated that a new currency be introduced in February 1963, modeled after the South African pound’s replacement with the rand.
The sterling was depreciated against the US dollar in 1967. However, the Australian dollar remained pegged to the US dollar at a rate of 1 AUD = 1.12 USD, thereby leaving the sterling system. The first Australian dollar paper notes were issued in 1966 in denominations of $1, $2, $10, and $20.
The $5 bill was first issued in 1967, followed by the $50 bill in 1973 and the $100 bill in 1984.
In 1988, the Reserve Bank of Australia released polymer banknotes for the first time, namely polypropylene polymer, to commemorate the hundredth anniversary of European colonization of Australia. Polymer notes are now used in all Australian banknotes. The country was the first to manufacture and use polymer banknotes.
Markets for the Australian Dollar and Foreign Exchange
Starting with the 5 AUD notes issued in September 2016, a new series of AUD polymer notes is being unveiled. On September 20, 2017, a new 10 AUD note was released, and on October 18, 2018, a new 50 AUD note was released.
The new 20 AUD bill went into circulation on October 9, 2019, while the new 100 AUD note went into circulation on October 29, 2020. AUD denominations of 5, 10, 20, 50, and 100 are now in use. In terms of coins, 1 and 2 Australian dollars, as well as 5, 10, 20, and 50 cents, are now in use.
Because Australia is one of the world’s largest exporters of iron ore and coal, the value of the Australian dollar is highly influenced by commodity prices. Oil prices fell to a ten-year low during the 2015 energy slump, while iron ore and coal prices also fell to new lows.
As a result, the Australian dollar has been severely depreciated, falling by more than 15% versus the US dollar and approaching parity with the New Zealand dollar (NZD) for the first time since the 1970s.
The value of the Australian dollar among forex traders is linked to the country’s geography, geology, and government policy. Australia is one of the world’s wealthiest countries in terms of natural resources, such as metals, steel, diamonds, meat, and fur. It also has a significant impact on the surrounding areas.
In 2019, the Australian dollar was the world’s fifth most traded currency, accounting for nearly 7% of all foreign exchange transactions. Australia’s high level of commerce is attributed in part to the country’s economic and political stability, as well as low government intervention in the foreign exchange market.
Additional Information
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- Dollar of the Cayman Islands (CYD)
- Pair of currencies
- The Eurozone Monetary System (EMS) (EMS)
- Dollars are a form of hard currency.
Commodity prices and terms of trade
Over a long period of time, the conditions of trade and the value of the Australian dollar have had a strong association. The ratio of export prices to import prices is measured by terms of trade.
An increase in the terms of trade is often related with an increase in the Australian dollar’s value, whilst a decrease in the terms of trade is connected with a decrease in the Australian dollar’s value.
Commodity prices have a significant impact on trade arrangements (commodities are goods such as iron ore, natural gas and agricultural products). This is due to the fact that commodities make for a substantial portion of Australia’s exports, hence changes in commodity prices affect export pricing.
An increase in the price of iron ore, for example, usually results in better export prices and improved terms of trade. Higher commodity export prices necessitate more Australian dollars to acquire the same amount of Australian commodity exports.
Bottomline
The value of the Australian dollar has a significant impact on Australian-based investors because it directly affects the value of (and thus returns from) international investments and indirectly affects the performance of domestic assets such as shares through the impact on Australia’s competitiveness. Currency changes, on the other hand, are one of the most difficult things to get correctly.
This year has been no exception, with the $A rising to $US0.80 in February before plummeting to $US0.71 recently. The forecast for the $A is discussed in this note.
