A freely suspended magnetic needle comes to rest pointing approximate north - south direction. This is because of an external magnetic field - the magnetic field of earth. Earth behaves as a magnet whose field is similar to that of a huge bar magnet and is of the order of 10 raised to -5 T.
The source of geomagnetism is not an exact single one. A reasonable guess is that due to the electrical current produced by convective motion of metallic fluids ( consisting mostly of molten iron and nickel) in the outer core of the earth. This is known as the dynamic effect.
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