| Updated: September 12, 2025Profile of Australia’s dollar – important facts
This lesson will cover the following
- Important facts regarding the Australian dollar
- Commodity correlation
- Carry trades
Important facts regarding the Australian dollar
First of all, The Australian dollar tends to exhibit a strong correlation with commodity prices, including gold. The nation is the second-largest producer of gold worldwide and, as a result, its national currency is usually favoured by any increase in commodity prices. If prices fall, the Australian dollar will usually also lose value. If commodity prices remain in a resilient uptrend, this may trigger concerns about the inflation rate. In response, the central bank will usually have to raise its benchmark interest rate in order to curb inflation.
Prices of gold, however, tend to surge in situations of economic or political turmoil, as gold is considered a safe-haven asset (investors will tend to abandon riskier assets such as stocks and purchase gold, government bonds and other haven currencies such as the yen and the franc). If the central bank were to raise interest rates at such a moment, this would render the Australian economy vulnerable to adverse effects caused by global uncertainty.
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Secondly, the Australian dollar is among the most popular currencies used in carry trades. This is because Australia is among the developed nations with the highest interest rates. A carry trade requires purchasing (lending) a currency with a high interest rate and selling (borrowing) a currency with a low interest rate.
Over 90% of the advance of the AUD/USD pair during the period 2001-2007 was the result of carry trades. Large foreign investors, constantly in pursuit of high returns, will usually enter carry trades when stock markets are offering low returns. It should be noted, however, that carry trades last only while the yield differential exists. If other central banks worldwide were to raise their base interest rates, this would narrow the positive interest-rate differential between Australia and those countries. Therefore, the Australian dollar would not be as attractive a carry-trade currency as it was before.
Thirdly, the interest rate differential between Australian cash rates and short-term yields in other industrialised nations is another key factor that currency traders should take into consideration. This differential can be used as an indication of potential money flows because it reflects the premium yield that short-term fixed-income assets in Australia offer over similar assets elsewhere. Interest-rate differentials also indicate possible currency movements, owing to investors’ willingness to hold higher-yielding assets.
Fourthly, the Australian economy is, to a large extent, dependent on weather patterns. As most of the nation’s exports are commodities, severe weather has the potential to ruin farming activities. In 2002 Australia faced a severe drought and the farming sector was heavily affected. As mentioned in the previous article, the agricultural sector in Australia accounts for 4% of the nation’s total GDP, so a sharp reduction in farming output may directly curtail the rate of economic growth. In addition, industries that supply and service the agricultural sector in Australia (the wholesale and transport sectors, and retail operations in rural farming regions) may also be adversely affected by droughts.