USD - United States Dollar

The dollar (currency code USD) is the unit of currency of the United States. It is normally abbreviated as the dollar sign, $, or as US$ to distinguish it from other dollar-denominated currencies (and others that use the $ symbol). The U.S. dollar is divided into 100 cents.

Adopted by the Congress of the Confederation of the United States on July 6, 1785, the U.S. dollar is the currency most used in international transactions. Several countries use the U.S. dollar as their official currency, and many others allow it to be used in a de facto capacity. In 1995, over US$380 billion were in circulation, of which two-thirds was outside the United States. By 2005, that figure had doubled to nearly $760 billion with an estimated half to two-thirds being held overseas, which is an annual growth of about 7.6%. However, as of December 2006, the dollar was surpassed by the euro in terms of combined value of cash in circulation. The value of euro notes in circulation had risen to more than ˆ 610 billion, equivalent to US$802 billion at the exchange rates at the time.

Gold coins were withdrawn in 1933 and the gold standard was changed to 13.71 grains, equivalent to setting the price of 1 troy ounce of gold at $35. This standard persisted until 1968. Between 1968 and 1975, a variety of pegs to gold were put in place. 1975 saw the U.S. dollar freely float on currency markets.

International use

The dollar is also used as the standard unit of currency in international markets for commodities such as gold and petroleum. Even foreign companies with little direct presence in the United States, such as the European company Airbus, list and sell their products in dollars, although some argue this is attributed to the aerospace market being dominated by American companies.

At the present time, the U.S. dollar remains the world's foremost reserve currency, primarily held in $100 denominations. The majority of U.S. notes are actually held outside the United States. Economist Paul Samuelson and others maintain that the overseas demand for dollars allows the United States to maintain persistent trade deficits without causing the value of the currency to depreciate and the flow of trade to readjust. Milton Friedman at his death believed this to be the case but, more recently, Paul Samuelson has said he now believes that at some stage in the future these pressures will precipitate a run on the U.S. dollar with serious global financial consequences.

Not long after the introduction of the Euro (ˆ; ISO 4217 code EUR) as a cash currency in 2002, the dollar began to depreciate steadily in value. After the Euro started to rise in value in March 2002, the U.S. trade and budget deficits continued to increase. By Christmas 2004 the dollar had fallen to new lows against all major currencies, especially the Euro. The Euro rose above $1.36/ˆ (under 0.74 ˆ/$) for the first time in late December 2004, in sharp contrast to its lows in early 2003 ($0.87/ˆ). In late May and early June, the U.S. dollar, with the advantage of Federal Reserve's policy of raising rates, rose significantly against all major currencies. The U.S. dollar broke almost all expectations in 2005 (some analysts previewed the dollar dropping as far as $1.60 per Euro), finished the year with a significant double-digit recovery against the EU Euro and Japanese Yen. However in 2006, the dollar again showed a double digit (11%) loss against the Euro.

Dollarization

Other nations besides the United States use the U.S. dollar as their official currency, a process known as official dollarization. Panama has been using the dollar alongside the Panamanian balboa as the legal tender since 1904 with a rate of change of 1:1, and the local currencies of Bermuda and the Bahamas can also be freely exchanged at a 1:1 ratio for USD. Argentina used a fixed 1:1 exchange rate between the Argentine peso and the U.S. dollar from 1991 until 2002.

The currencies of Barbados and Belize are similarly convertible at an approximate 2:1 ratio. In Lebanon, one dollar is equal to 1500 Lebanese pound, and is used interchangeably with local currency as de facto legal tender. The exchange rate between the Hong Kong dollar and the United States dollar has also been linked since 1983 at HK$7.8/USD, and pataca of Macau, pegged to Hong Kong dollar at MOP1.03/HKD, indirectly linked to the U.S. dollar at roughly MOP8/USD. Several oil-producing Gulf Arab countries, including Saudi Arabia and Kuwait, peg their currencies to the dollar, since the dollar is the currency used in the international oil trade.

In Peru the U.S. dollar is commonly accepted. Ecuador (2000), El Salvador (2001), and East Timor (2000) all adopted the currency independently. The former members of the U.S.-administered Trust Territory of the Pacific Islands, which included Palau, the Federated States of Micronesia, and the Marshall Islands, chose not to issue their own currency after becoming independent, having all used the U.S. dollar since 1944. Two British dependencies also use the U.S. dollar: the British Virgin Islands (1959) and Turks and Caicos Islands (1973).

The renminbi(yuan) used by the People's Republic of China was informally and controversially pegged to the dollar in the mid-1990s at Y8.28/USD. Likewise, Malaysia pegged its ringgit at RM3.8/USD in 1997. On July 21, 2005 both countries removed their pegs and adopted managed floats against a basket of currencies.

In Cambodia, the USD circulates freely, or even preferred over the Cambodian riel. Amount of one dollar or more is given in dollar, while the riel serves as a subunit.

The dollar as the major international reserve currency

Main article: Reserve currency

The dollar is the most important international reserve currency, followed by the euro. The euro inherited this status from the German mark, and since its introduction, has increased its standing considerably, mostly at the expense of the dollar. Despite the dollar's recent losses to the euro, it is still by far the major international reserve currency, with an accumulation nearly three times that of the euro.

Historical exchange rates