Understanding the AUD (Australian Dollar): History, Forex Impact, and Key Factors
AN
Summary:
The AUD (Australian Dollar) is a cornerstone in global finance, serving as Australia’s official currency and extending its influence to Pacific Island nations. This article meticulously dissects the AUD’s historical roots, management by the Reserve Bank of Australia, and its pivotal role in the forex market. With a focus on neutrality and directness, we navigate through the intricacies of the AUD’s journey from replacing the Australian pound in 1966 to becoming one of the top 5 most traded currencies globally.
Get Competing Personal Loan Offers In Minutes
Compare rates from multiple vetted lenders. Discover your lowest eligible rate.
It's quick, free and won’t hurt your credit score
What is the AUD (Australian dollar)?
The AUD (Australian Dollar), colloquially known as the “Aussie,” stands as the official currency for the Commonwealth of Australia. Its inception in 1966 marked the termination of the Australian pound, a vestige from the colonial era. Denoted by symbols like $, A$, or AU$, the Australian dollar holds significance beyond Australia, being the official currency for Pacific Island states, including Nauru, Tuvalu, and Kiribati.
Understanding the AUD
The Australian dollar made its debut on February 14, 1966, signifying the end of the Australian pound era. Initially pegged to the Great Britain pound sterling, it later shifted to pegging with the U.S. dollar in 1967. A significant juncture in its evolution occurred in 1983 when the AUD transitioned to a free-floating currency, abandoning fixed pegs and embracing a trade-weighted index approach.
Management by the reserve bank of Australia
Tasked with overseeing the AUD is the Reserve Bank of Australia (RBA), established in 1960 and wholly owned by the Australian government. The RBA plays a pivotal role in shaping the country’s monetary policy, issuing currency, and managing the money supply.
The AUD’s value is intricately tied to Australia’s position as one of the world’s largest exporters of coal and iron ore. The Reserve Bank’s role in managing the currency becomes crucial, especially during economic fluctuations. Historical instances, such as the commodity slump of 2015, showcased the AUD’s vulnerability, weakening significantly against the U.S. dollar and reaching parity against the New Zealand dollar (NZD).
AUD and forex markets
The popularity of the AUD in forex trading is grounded in its three Gs: geology, geography, and government policy. Australia’s abundant natural resources, including metals, coal, diamonds, meat, and wool, contribute to its economic robustness. The AUD/USD currency pair, commonly referred to as the “Aussie,” exhibits a negative correlation with USD/CAD and USD/JPY, reflecting the dynamics of commodity-based currencies.
Notably, the AUD demonstrates a positive correlation with the New Zealand Dollar (NZD). As of 2019, it ranked as the fifth most traded currency globally, representing approximately 7% of foreign exchange transactions. Australia’s political and economic stability, coupled with limited government intervention, contributes to the AUD’s high trading volume.
Frequently asked questions
How does the Reserve Bank of Australia influence the AUD?
The Reserve Bank of Australia (RBA) plays a crucial role in managing the AUD by shaping monetary policy, issuing currency, and managing the money supply.
What led to the Australian dollar becoming a free-floating currency in 1983?
In 1983, the AUD transitioned to a free-floating currency, abandoning fixed pegs and adopting a trade-weighted index approach.
How did the commodity slump of 2015 impact the AUD?
During the commodity slump of 2015, the Australian dollar weakened significantly against the U.S. dollar and reached parity against the New Zealand dollar (NZD).
Why is the AUD positively correlated with the NZD?
The AUD and NZD tend to exhibit a positive correlation in forex markets.
Key takeaways
- The AUD, introduced in 1966, replaced the Australian pound and is the official currency of Australia.
- Managed by the Reserve Bank of Australia, the AUD’s value is heavily influenced by commodity prices.
- The AUD is among the top 5 most traded currencies globally, favored for its stability and limited government intervention.
Share this post: