What does the Australian slang term dag mean?

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According to the Urban Dictionary:
A dag is technically the matted wool on a sheep's tail, but in typical useage throughout Australia, it refers to people who don't have a neat, tidy or cultured appearance. It can also refer to a person who tends to be quite informal.

It is not necessarily a derogatory term in modern useage, but may have negative connotations - ie " He's a real dag!" or as an adjective - " His clothes are daggy." Often it is used in relation to someone unfashionable.

The term "dag" is also a type of compliment as used between mates, both male and female. For example, "you dag" means you're a good friend, and I know you don't mind me having a bit of fun with you, and putting you down in a way that I don't really mean.

A real dag is the matted sheep droppings and dirt mixed with the wool on the sheep's backside. To clean the dags out of the wool means to clean the matted wool of droppings. It's also any long, dangling, matted part of the wool. Dag may even refer to the long, matted, untidy and dirty parts of another animal's coat, e.g. dags on a long-haired dog, especially the parts that hang down close to the ground and get dirty, or dags in a neglected horse's tail, etc.
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