A highly traded currency

Australia is the 13th largest economy in the world, so it’s a bit surprising to hear that our dollar is about the fifth most traded currency. Part of the reason for that is because Australia trades internationally — a lot. “We sell a lot of raw materials like iron ore and coal,” says Richard Holden, a professor of economics at the University of New South Wales. “We even sell quite a lot of education, our third largest export industry, and we buy a lot of stuff. “We’re very open, we trade a great deal and therefore our currency is used a lot.” That, he says, makes it important for banks around the world to hold “a reasonable amount” of Australian dollars in reserve.

Our time zone is another factor

Because Australia’s awake when Europe and North America are asleep, currencies are traded through Sydney, which means the AUD is traded a great deal. “That explains its rather high ranking on the ladder of the most traded currencies,” says Dirk Bauer, a professor of accounting and finance from the University of Western Australia. Once you’re a highly traded currency, that quality becomes self-fulfilling. “It’s sort of like a chicken and egg thing: because it’s so heavily traded it’s an attractive market to get into because it seems to be one that you can pretty readily get out of,” explains Adrian Rollins, an economics writer who contributes to In The Black magazine. So: we’re in the market, in the right time zone, and it’s easy to get in and out of Aussie dollars. That all adds up.

But what determines the value of the dollar?

There’s a number of factors that influence what the Aussie dollar is worth at any given time. Rollins calls it a “shifting smorgasbord”.
The biggest single factor on the menu, in the long-term, is interest rate differentials — the difference between the interest rates of two countries. Let’s take America as an example.

“If interest rates in Australia are very high relative to the US, that makes it attractive for investors to take their US dollars, come buy Australian dollars and invest in, say, Australian government bonds,” Professor Holden says.”And, of course, that causes them to sell US dollars [and] buy Australian dollars, changing the difference in supply and demand between the two currencies and shifting the Australian dollar up.”

This isn’t always a smooth process. If you look at what happens over the course of a year or 18 months, it’s more like a rollercoaster. In every newspaper, every day, you’ll find an update on the value of the dollar. Richard Aedy explores why. “The Australian dollar is actually a very volatile currency,” Professor Holden says. “In recent years … we’ve seen the Australian dollar go from around 50 US cents to around $US1.10 and a whole bunch in between — in a very jagged-jaggedy way.”

There are other factors at play as well — like the fortunes of Asian economies. Rollins says many investors see the Australian dollar as a “proxy for exposure to the emerging Asian markets”. “Partly this is because it’s such a heavily traded currency… it’s a reasonably safe and liquid way to expose yourself to what’s going on in the emerging Asian markets,” he says.

“It’s seen as quite a valuable trade to make to try and ride the tiger of Asia without being full-blooded exposed to it.” You may also have heard the dollar referred to as a “commodity currency” — that’s because its value also moves with the prices of commodities like gold, oil and natural gas. “In simple terms if the iron ore prices and other commodity prices go up, the Australian dollar will go up. And if oil prices and other commodity prices godown, then the Australian dollar will follow, and that makes it special,” Professor Bauer says.

Can a low dollar be a good thing?

If you’ve travelled overseas, you’ve probably felt the pain of a bad exchange rate. And it impacts on businesses too, affecting different industries in different ways.
A low dollar can be a good thing for exporters, and the local tourism industry. The Money explains how the Australian economy and everything in it works, and how this all connects to the global economy.

“Why is that? Well it makes our stuff relatively cheaper for people overseas to buy… and that’s good for our exporters,” Professor Holden says.

“An Australian dollar at 50 cents makes it really easy and cheap for US tourists to eat at expensive restaurants, or travel around Australia, and stay in hotels and all that kind of stuff.”

On the other side of the coin, a low dollar spells bad news for the many businesses and households who purchase goods and services in US dollars. “A low Australian dollar is damaging because it makes the stuff that we buy to run our businesses more expensive,” Professor Holden explains.