additional to the previous definitions: australia (and new zealand) are sheep-farming countries and our populations are familiar with many of the aspects of farming livestock. a "dag" or "dags" is the colloquial term for the dung which collects and mats into the fleece immediately surrounding a sheep's anus; it hangs in dried-out dangling clumps which make a sound when the sheep runs, hence the phrase "rattle your dags". a sheep should be "ring crutched" to avoid or relieve this condition: crutching is the removal by shearing of all fleece surrounding the genitals usually in a circular shape or ring. a sheep not cared for properly in this way will otherwise collect dags - hence the possible connection to insults concerning fashion and appearance. the sight of a daggy sheep is unattractive and comical, although the mats of contaminated fleece may be painful and usually attract blowflies and other pests; and therefore to call someone "daggy" is to liken them directly to a neglected sheep's anal region suffering from this condition.
oh gross that outfit makes you look totally daggy - take it off quick!