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The Australian dollar (AUD) is often considered a “commodity.” This means that its value is closely tied to the price of commodities like gold, silver, and oil. The AUD’s value falls when the prices of these commodities decline and increases when their prices go up. There are several reasons why commodity currencies are so common. To learn more about this topic, you can check out Saxo Bank’s overview of commodity currencies.
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The Australian dollar is closely linked to the prices of commodities
The Australian dollar is considered a commodity currency because it is closely linked to the prices of commodities such as gold, coal, and iron ore. When the prices of these commodities rise, the value of the Australian dollar also tends to increase. This is because commodity prices are a significant driver of economic growth in Australia, and demand for the Australian dollar increases when the economy is doing well.
However, the close link between the Australian dollar and commodity prices can also be a source of volatility. For example, when there is a sudden drop in the price of oil, the value of the Australian dollar can also fall sharply. This is because investors will sell off their Australian dollars to buy assets more likely to hold their value in a time of economic uncertainty.
The effect of commodity prices
Australian dollars are floating currencies, meaning their exchange rate is determined by supply and demand. One of the main factors influencing the exchange rate is the price of commodities.
Australia is a significant exporter of commodity items such as iron ore, coal, and gold, so commodity price movements can significantly impact the Australian dollar’s value. If commodity prices rise, this tends to increase demand for the Australian dollar and push its exchange rate. Conversely, if commodity prices fall, this can lead to a decline in the value of the Australian dollar.
Hence, commodity prices are an essential factor to keep an eye on if you are interested in the exchange rate of the Australian dollar.
Global economic conditions
The Australian dollar is a floating currency, which means the market determines its value. The market can influence various factors, including global economic conditions and central bank interest rates. For example, when the global economy is doing well, demand for commodities such as iron ore and coal increases, driving up the value of the Australian dollar.
On the other hand, when central banks raise interest rates, this often leads to an appreciation of their currency, making it more expensive for Australian exports and hence lowering the value of the Australian dollar. Therefore, central banks worldwide are a crucial driver of the Australian dollar.
Volatility
The Australian dollar is a currency subject to much volatility in recent years. Its movements primarily depend on the commodities market, as Australia is a significant exporter of resources such as coal and iron ore.
However, when commodity prices fall, the dollar usually follows suit. This can make it a hard currency to predict, but also one that can offer opportunities for traders. Despite the volatility, the Australian dollar remains a virtual currency in the global economy and is likely to continue to fluctuate in the years to come.
How does the AUD compare to other currencies?
The Australian dollar is one of the most traded currencies in the world and is ranked fifth in global reserves. As of July 2019, the Australian dollar was worth 0.69 US dollars, 0.58 British pounds, 0.78 euros, and 106.68 Japanese yen.
The Australian dollar has been relatively strong in recent years due in part to the country’s strong economy and stable political environment. However, the currency has been affected by several factors, including ongoing economic and current events.
Despite these challenges, the Australian dollar remains one of the most popular currencies in the world.
The bottom line
The Australian dollar is a commodity currency due to its value fluctuating with changes in the global market for commodities. The Reserve Bank of Australia (RBA) is attempting to reduce the link between the Australian dollar and commodities to make it less volatile. However, currently, this has not been easy to achieve.
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