The Australian dollar is special — it's one of the most highly traded currencies in the developed world, and it makes the news every day.

It goes up, down or holds steady because of a wide range of factors: everything from interest rates to Donald Trump, described by one finance expert as a "walking geopolitical event".

Its movement affects us all — and it goes much deeper than the link between the exchange rate and how many items are in our online shopping carts.

So what's driving its rollercoaster ride? Let's start with something (relatively) simple: why it's traded so much.

A highly traded currency

Australia is the 13th largest economy in the world, so it's a bit surprising to hear that our dollar is about the fifth most traded currency.

Part of the reason for that is because Australia trades internationally — a lot.

"We sell a lot of raw materials like iron ore and coal," says Richard Holden, a professor of economics at the University of New South Wales.

"We even sell quite a lot of education, our third largest export industry, and we buy a lot of stuff.

"We're very open, we trade a great deal and therefore our currency is used a lot."

That, he says, makes it important for banks around the world to hold "a reasonable amount" of Australian dollars in reserve.

Our time zone is another factor.

Australia's time zone partly explains why our dollar is so highly traded. ( Getty: Adam Gault )

Because Australia's awake when Europe and North America are asleep, currencies are traded through Sydney, which means the AUD is traded a great deal.

"That explains its rather high ranking on the ladder of the most traded currencies," says Dirk Bauer, a professor of accounting and finance from the University of Western Australia.

And once you're a highly traded currency, that quality becomes self-fulfilling.

"It's sort of like a chicken and egg thing: because it's so heavily traded it's an attractive market to get into, because it seems to be one that you can pretty readily get out of," explains Adrian Rollins, an economics writer who contributes to In The Black magazine.

So: we're in the market, in the right time zone, and it's easy to get in and out of Aussie dollars. That all adds up.

But what determines the value of the dollar?

There's a number of factors that influence what the Aussie dollar is worth at any given time. Rollins calls it a "shifting smorgasbord".

The biggest single factor on the menu, in the long-term, is interest rate differentials — the difference between the interest rates of two countries. Let's take America as an example.

"If interest rates in Australia are very high relative to the US, that makes it attractive for investors to take their US dollars, come buy Australian dollars and invest in, say, Australian government bonds," Professor Holden says.

"And, of course, that causes them to sell US dollars [and] buy Australian dollars, changing the difference in supply and demand between the two currencies and shifting the Australian dollar up."

This isn't always a smooth process. If you look at what happens over the course of a year or 18 months, it's more like a rollercoaster.

"The Australian dollar is actually a very volatile currency," Professor Holden says.

"In recent years ... we've seen the Australian dollar go from around 50 US cents to around $US1.10 and a whole bunch in between — in a very jiggedy-jaggedy way."

There are other factors at play as well — like the fortunes of Asian economies.

Rollins says many investors see the Australian dollar as a "proxy for exposure to the emerging Asian markets".

"Partly this is because it's such a heavily traded currency ... it's a reasonably safe and liquid way to expose yourself to what's going on in the emerging Asian markets," he says.

"It's seen as quite a valuable trade to make to try and ride the tiger of Asia without being full-blooded exposed to it."

You may also have heard the dollar referred to as a "commodity currency" — that's because its value also moves with the prices of commodities like gold, oil and natural gas.

"In simple terms if the iron ore prices and other commodity prices go up, the Australian dollar will go up. And if oil prices and other commodity prices go down, then the Australian dollar will follow, and that makes it special," Professor Bauer says.

Money, money, money: Lessons from a forex trader

Within the dollar's gyrations is the chance for forex traders, who buy a currency at one price and sell it at a better one, to make some very big bucks.

"They're living in a kind of micro world where upticks and down-ticks of tenths of a percentage point make a big difference," Professor Holden says.

Andrew Taylor is a forex trader and the chief executive of Royal Financial Trading in Sydney. When he's determining the value of the dollar, he divides all the factors into three categories: macro, micro and monetary policy.

The macro, he says, is all about "big political events occurring over long periods of time".

He lists things like Brexit, trade wars, tensions over North Korea's nuclear capacity, and any number of actions by Mr Trump — a "walking geopolitical event in himself".

Part of what goes into the macro bucket is something called risk appetite: more-or-less how the market is feeling about the future.

If the economy is looking pretty rosy, it's "risk on".

"The investment capital starts to flow in and chase that optimism," Mr Taylor says.

"They tend to be higher yielding types of assets — things like the Australian dollar, commodities, equities."

On the flip side is "risk off", where there's more negativity and uncertainty in the market. In that environment, investors are likely to seek low-risk assets — safe havens such as the Yen and US Treasuries.

This is what the currency exchange rates looked like after Brexit. ( Getty: Saeed Khan )

Micro factors are the weekly, monthly, quarterly and yearly data releases. There's a bunch of them, and part of the challenge for traders is to work out which ones are important.

Mr Taylor looks at the data on labour markets, inflation, manufacturing and services, and sentiment. They all give him insight into how the economy is going.

"For example … if you've got optimism around jobs and growth, people will feel ... comfortable to go out and borrow and spend, and that helps with the growth picture."

And that leads us to monetary policy — aka interest rates.

Mr Taylor calls this "the biggest element within the puzzle". He pays close attention to the brief, measured statements the Reserve Bank issues with each rates decision.

"They choose their words carefully. I look at ... the rhetoric behind what they're saying, what they're looking at, any factors that they're looking at in future," he says.

Can a low dollar be a good thing?

A low dollar is good for tourism, but bad for many other businesses. ( Flickr: David Molloy Photography )

If you've travelled overseas, you've probably felt the pain of a bad exchange rate (or been lucky enough to benefit from a good one).

And it impacts on businesses too, affecting different industries in different ways.

A low dollar can be a good thing for exporters, and the local tourism industry.

"Why is that? Well it makes our stuff relatively cheaper for people overseas to buy... and that's good for our exporters," Professor Holden says.

"An Australian dollar at 50 cents makes it really easy and cheap for US tourists to eat at expensive restaurants, or travel around Australia, and stay in hotels and all that kind of stuff."

On the other side of the coin, a low dollar spells bad news for the many businesses and households who purchase goods and services in US dollars.

"A low Australian dollar is damaging because it makes the stuff that we buy to run our businesses more expensive," Professor Holden explains.

"[If] your local coffee shop takes your order on an iPad, it's buying that in US dollars. The software that runs on that, the point of sale software, is typically made overseas and denominated in US dollars.

"When the Australian dollar falls ... businesses invest less."

Where are we now — and what next?

As Rollins notes, there's never just one factor determining the value of the dollar.

"It's a dynamic environment," he says.

"You can't just tick off the checklist and say it's interest rate differential all the time, it's credit rating all the time, it's the Australian dollar's a hedge all the time.

"The importance of these factors waxes and wanes as the environment shifts.

"In the forthcoming period you'd expect that those global factors and uncertainties ... would loom very large in how the Australian dollar plays out from now on."

What these two men do next will have an impact on the value of the AUD. ( Getty: Saul Loeb )

Those uncertainties, he says, are things like the prospect of a hugely damaging trade war between the US and China, and anxiety over the political climate in Germany.

"And then you've got the running sore of Brexit in the background — and even North Korea could rear its head again," Rollins adds.

For all the long-term importance of interest rate differentials, 25 years of economic growth and a triple-A rating, that seems to be where we are: the things we can't control — things that happen outside of Australia — are likely to have the biggest impact on our dollar.

"Probably the US dollar is going to play continue to play its role as a safe haven, which you'd expect would put downward pressure on the Australian dollar," Rollins says.