Ruqayyah Snyder
The Australian dollar is the official currency of Australia, which is subdivided into 100 cents. The currency was introduced in 1966 to replace the Australian pound, with the conversion rate of two dollars to the pound. Australian coins are produced by the Royal Australian Mint, which has created over 14 billion circulating coins since opening in 1965. The Australian dollar is also the official currency in Kiribati, Nauru, and Tuvalu. Due to its popularity in the forex market, the AUD-USD pair is one of the most traded currency pairs in the world.
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What You'll Learn
Australian dollar value relative to the US dollar
The Australian dollar is a popular currency for exchange with the US dollar, given that the US is Australia's largest trading partner. The AUD/USD currency pair is commonly known as the "Aussie". The AUD is considered a commodity currency due to Australia's significant exports of raw materials such as precious metals, oil, and agricultural products. The Reserve Bank of Australia (RBA) has historically maintained higher interest rates compared to other industrialized nations, making the AUD attractive for carry traders looking for higher yields.
The value of the Australian dollar against the US dollar fluctuates. For example, in the last few days, the AUD/USD pair fell to a multi-week low of 0.7263 on Friday. The AUD/USD pair closed the trading week a handful of pips above this value. The AUD/USD currency pair represents how many US dollars (the quote currency) are needed to purchase one Australian dollar (the base currency).
The Australian economy and currency are closely tied to China, its largest trading partner. Any changes in the Chinese economy can significantly impact the AUD. Additionally, the Australian dollar is often seen as a diversification tool due to its exposure to Asian economies.
The AUD/USD currency pair is influenced by various factors, including interest rates, trade policies, and economic conditions in both countries. For example, uncertainty surrounding former US President Trump's global tariffs and concerns about a slowdown in the US economy have weighed on the US dollar, creating a tailwind for the AUD/USD pair.
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History of the Australian dollar
The Australian dollar (AUD) is the official currency and legal tender of Australia, as well as its external territories and three independent Pacific Island states: Kiribati, Nauru, and Tuvalu.
The history of the Australian dollar can be traced back to the early days of the colony of New South Wales in 1788, when colonists relied on barter, spirits like rum, and even Spanish dollars as a makeshift currency. In 1825, the British government legislated a sterling currency for the colony, which remained the basis of Australian currency until 1966.
In 1910, Australia created its first national currency, the Australian pound, which was at par with the British pound. However, in 1931, the Australian pound was devalued, reflecting a view about the stability of the British pound. From 1946 to 1971, Australia maintained a peg under the Bretton Woods system, which fixed the exchange rate of the Australian currency to the British pound.
In 1959, the Commonwealth Government appointed a Decimal Currency Committee to investigate the advantages and disadvantages of a decimal currency for Australia. In 1960, the Committee recommended the introduction of a decimal currency system, and in 1963, the government announced that a decimal currency would be introduced at the earliest practicable date.
Finally, on February 14, 1966, the Australian pound was replaced by the Australian dollar, with a conversion rate of two dollars to the pound. The $ symbol was intended to have two strokes, but the version with one stroke was also accepted. The first paper notes of the Australian dollar were published in denominations of $1, $2, $10, and $20, while coins were introduced in denominations of 1 and 2 cents (bronze), 5, 10, and 20 cents (cupronickel), and 50 cents (silver, later cupronickel).
In 1967, Australia effectively left the sterling area when the pound sterling was devalued against the US dollar, but the Australian dollar retained its peg to the US dollar at a rate of A$1 = US$1.12. Since then, the Australian dollar has moved to a floating exchange rate, and Australia has become one of the biggest exporters of iron ore and coal, with the value of the Australian dollar heavily influenced by commodity prices.
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Australian dollar coins
The Royal Australian Mint has released a number of commemorative one-dollar coins since 1984, some of which were not released into circulation. These include coins commemorating the Australian Bicentenary, the International Year of Peace, the International Year of Volunteers, the Year of the Outback, the Centenary of Federation, the International Year of Older Persons, and the centenary of the birth of aviation pioneer Sir Charles Kingsford-Smith.
The minting of one- and two-cent coins was discontinued in 1991 due to the metal exceeding face value, and they were withdrawn from circulation beginning in 1992. Since 1991, both coins have only been minted as collectors' items. The "silver" 5c, 10c, and 20c coins can be counted by weight without the need to count individual pieces, as they have the same weight per value. The original 50c coin, containing 80% silver and 20% copper, was produced for one year and then withdrawn from circulation as the metal quickly became worth more than 50c. A dodecagonal (12-sided) 50c coin was introduced in 1969.
The Royal Australian Mint regularly releases collectible coins, including the famous 1980-1994 gold two-hundred-dollar coin series. Australian collectible coins are legal tender and can be used directly as currency or converted to "normal" coinage at a bank.
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Australian dollar as legal tender
The Australian dollar is the official currency and legal tender of Australia and its external territories: Christmas Island, Cocos (Keeling) Islands, and Norfolk Island. It is also the official currency of three independent sovereign Pacific Island states: Kiribati, Nauru, and Tuvalu.
The Australian dollar was introduced as a decimal currency on February 14, 1966, replacing the non-decimal Australian pound. The $1, $2, $10, and $20 notes had exact equivalents in the former pound notes. The $5 note was introduced a year later in May 1967, followed by the $50 note in 1973, and the $100 note in 1984. The $1 and $2 notes were replaced by $1 and $2 coins in 1984 and 1988, respectively.
All previous issues of Australian banknotes and coins remain legal tender, although some retailers and members of the public may be reluctant to accept them due to unfamiliarity or suspicion of counterfeiting. The Reserve Bank of Australia occasionally releases new series of banknotes with enhanced security features, such as microprinting and tactile features for the visually impaired.
In addition to its use in Australia and its external territories, the Australian dollar is also legal tender in Kiribati, Nauru, and Tuvalu. These countries do not have their own coinage or banknotes and, as a result, the Australian dollar is the dominant currency in these nations.
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Trading the Australian dollar
The Australian dollar is one of the five most frequently traded currencies in the world. This is surprising, given that Australia is not a particularly large country, and as of 2022, it was 12th in the world in terms of GDP, 56th in terms of population, and 20th in terms of the value of its exports.
There are several reasons for the popularity of the Australian dollar among currency traders. Firstly, Australia has an abundance of natural resources that are in high demand, including oil, gold, agricultural products, diamonds, iron ore, uranium, nickel, and coal. This positions the Australian dollar as a popular alternative for traders looking to invest in commodities and Asian resource demand. The demand in China, India, and, to a lesser extent, Japan, for these natural resources has pushed the Aussie dollar up in past cycles.
Secondly, Australia has a stable government and a generally pro-business environment. Australia also has fairly stable, high-interest rates, which are set by the Reserve Bank of Australia (RBA). The RBA reviews the interest rate every month, and because these rates are so much higher than those in Japan, Australian dollar-denominated assets have been attractive holdings for carry traders.
Finally, Australia has a close economic relationship with the US, and they are trusted trade and investment partners. The Australia-United States Free Trade Agreement (AUSFTA) came into effect in 2005, and since then, the export of US goods to Australia has increased by over 91%. The interest-rate differential between the two countries will also affect the value of the AUD/USD exchange rate. For example, if the US Federal Reserve were to increase interest rates, money may flow into the US, strengthening the US dollar and weakening the AUD/USD rate.
An individual can trade Aussie dollar to US dollar pairing with either a forex contract or a contract for difference (CFD) on a particular currency pair. CFDs are typically used within a limited timeframe and are considered a short-term investment or trade.
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Frequently asked questions
The Australian dollar is the legal tender of Australia, introduced on 14 February 1966, to replace the Australian pound. It is subdivided into 100 cents and produced by the Royal Australian Mint in Canberra.
The exchange rate fluctuates and has changed significantly over time. On 9 September 1973, the peg was adjusted to US$1 = AUD$1.4875. In December 1983, the Australian dollar was floated, and its value has since been determined by the balance of payments and supply and demand on international markets.
Australian coins have been made from various materials, including bronze, cupronickel (75% copper and 25% nickel), silver, and aluminium bronze (92% copper, 6% aluminium, and 2% nickel).
Yes, the Australian dollar is also legal tender in Christmas Island, Cocos (Keeling) Islands, Norfolk Island, Kiribati, Nauru, and Tuvalu. It was previously used in Papua New Guinea and the Solomon Islands until they adopted their own currencies in 1975 and 1977, respectively.
