What moves the Australian dollar

A floating currency since 1983

The Australian dollar has floated freely since December 1983, so its value is set by supply and demand in currency markets. FinVolio quotes it the standard way: the number of US dollars one Australian dollar buys.

The four big drivers

Commodity prices. Iron ore, coal, gas, gold and farm products make up much of what Australia sells overseas. When their prices rise, buyers need more Australian dollars to pay for them, and the currency tends to rise too. That is why it is often called a commodity currency.

Interest rates here compared with abroad. If Australian rates are higher than US rates, investors can earn more by holding Australian dollar deposits and bonds, which supports the currency. What matters is the gap, and what markets expect it to become. See the cash rate and the US federal funds rate.

Global risk appetite. The Australian dollar tends to rise when investors are confident and fall when they are fearful, as money moves back towards the US dollar and other havens. In a sharp sell-off on world share markets, the Australian dollar usually falls with them.

China. As Australia’s largest export market, China’s growth, and especially its demand for steel and therefore iron ore, has an outsized effect.

What a move means for you

A falling dollar raises the price of imports and overseas holidays, but lifts the value of overseas shares held by Australians when measured in Australian dollars. It also helps exporters, whose sales are often priced in US dollars.

A rising dollar does the opposite: cheaper imports and travel, and a drag on the Australian dollar value of overseas investments.

Many Australian super funds hold a large share of their assets overseas, and some leave part of it unhedged, so movements in the dollar flow straight through to many people’s balances.