The United States Dollar (USD) is the most widely traded currency in the world. Data obtained by the 2013 Triennial Central Bank Survey show that USD was either base currency or counter currency in 87% of all FX transactions carried out in 2013. The three most traded currency pairs all had the USD in them: EUR/USD made up 24% of the year’s FX trade, USD/JPY 18% and GBP/USD almost 9%.

Until quite recently, a bank that wanted to change Euro into any other currency on the interbank spot market had to change it into USD first, unless it wanted a European currency or the Japanese Yen. For all the remaining currencies in the world, the bank would have to do a two-step exchange. First change EUR into USD, and then change USD into the desired currency. This did of course have a large impact on the number of FX transactions that the USD was involved in. Nowadays, it is much easier for a bank to change Euro directly into the desired currency on the interbank spot market even when that currency is a non-European currency. This change has not altered the fact the the USD is, by a wide margin, the most traded currency on the FX market.

The USA and the Federal Reserve System

The value of the United States Dollar is constantly changing in relation to other major currencies such as the Euro and the British Pound, since it is sold freely on the FX market.

The United States Dollar used to have a gold standard and a silver standard, but it today fiat money. When the gold standard for the USD was abolished in 1971, the peg for one ounce of gold was 44.22 USD.

Since the 1970’s, the Federal Reserve System of the United States of America has focused on achieving a low and stable inflation rate rather than trying to prevent inflation. Moderate long-term interest rates has been an important objective. The over-arching goals are stable prizes and maximal employment, rather than having the strongest possible currency or minimal inflation.

The USA does not have any national central bank in the sense most other countries have. Instead, they have the Federal Reserve System of the United States that does not require the approval of congress, the president or any other public authority. Decisions are made by a combination of public sector representatives and private sector representatives. The Federal Reserve System is self-financed, so congress can not indirectly influence it by threatening budget cuts or earmarking funds.

The role and authority of the Federal Reserve System of the United States is outlined in the Federal Reserve Act.

The U.S. Department of Treasury is completely separate from the Federal Reserve System.

Where is USD is the official currency?

The United States Dollar is the official currency of the United States of America and its Overseas Territories.

However, the USD is also the official currency of several other countries, countries that have no rights to issue the currency. Some countries have adopted the USD as a non-exclusive official currency, while others have only the USD as their official currency. Panama, Ecuador and East Timor fall into a rather strange middle ground, since they mint coins in local currency but creates no bills in local currency and have their local coins pegged against the USD. Both the USD and the respective local currency are official currency in these three countries.

Examples of countries and territories where the USD is the only official currency are El Salvador, The Marshall Islands, The Republic of Palau, The Federated States of Micronesia, and Turks and Caicos Islands. Despite their historically strong ties to the United Kingdom, the British Virgin Islands have the United State Dollar as their official currency rather than the British Pound Sterling. Also, the Caribbean special municipalities of the Netherlands do not have the Euro as their official currency but the USD, despite being special municipalities of a country where Euro is the official currency.

Trivia

• Forex traders informally refer to the currency pair GBP/USD as cable. This nickname arose in North American in the 1800s, when the exchange rate for GBP/USD was sent between Europe and North America via the newly laid transatlantic telegraph cable.
• If we take a look at the world’s currency reserves, we will find an overwhelming amount of USD. Even though the EUR has become quite a popular reserve currency since its inception, the USD is still the dominating reserve currency by leaps and bounds.
• The International Monetary Fund (IMF) use a currency basket to calculate the value of IMF:s special drawing rights. The USD is one of the currencies in this basket; together with EUR, GBP and JPY.
• The ISO-4217 currency code for the United States Dollar is USD.
• The symbol used for dollar is $. When it is important to distinguish between United States Dollars and other dollars, the letters US is commonly added in front of the symbol (US$).
• 1 United States Dollar equals 100 cents. 1 cent equals 10 mill.
• There are no mill coins or bills in circulation. The mill unit is chiefly used for tax purposes.