The USD, abbreviated for the U.S. dollar ($), is the official currency of the United States and has stood as the world’s primary reserve currency for decades. It is governed by the Federal Reserve, the U.S. central bank.
Key Insights
- USD Abbreviation: The three-letter code for the U.S. dollar.
- Global Tender: Serving as legal tender in the U.S. and a global reserve currency.
- Historical Shift: Transitioned from the gold standard to a free-floating fiat currency in 1971.
- Forex Dominance: The most traded currency, especially the EUR/USD pair.
- Transaction Volume: Accounts for almost 90% of all forex transactions.
Delving Into the USD
The USD is recognized worldwide by the symbol ‘$’. One dollar is divided into 100 cents. Dollar banknotes currently come in denominations of $1, $2, $5, $10, $20, $50, and $100, featuring the portraits of U.S. presidents and historical figures like Benjamin Franklin.
Higher denominations like the $500 and $1,000 bills were phased out in 1969. Coins are minted in denominations ranging from 1 cent to $1. These banknotes and coins are produced by the Treasury Department and distributed via Federal Reserve banks.
With a daily average volume of nearly $1.2 trillion as of May 2022, the USD is the mostly traded currency globally, earning its position as a benchmark currency readily accepted in transactions worldwide.
88%
The USD accounts for roughly 88% of all foreign exchange transactions, as reported by the Bank for International Settlements (BIS) in 2019.
A Brief Historical Snapshot
The USD has been the official currency of the United States since the National Currency Act of 1785. Initially, it was represented solely by coins, with paper currency emerging in 1861. Its value was tethered to gold, silver, and copper prices.
Various acts of Congress altered its design and value, leading to the formalized oversight of the currency under the Federal Reserve Act of 1913. During this period, dollars were redeemable for precious metals, which ceased in 1933 as the U.S. moved away from the gold standard.
The 1944 Bretton Woods Agreement converted major world currencies to fixed exchange rates relative to gold, payable only in USD. This practice ended in 1971, leading to the dollar’s current status as a floating currency.
Globally, the USD serves as the primary reserve currency. Central banks maintain USD reserves as a hedge against inflation. The green-colored reverse of the dollar bills has given rise to the slang term “greenbacks”.
Measuring the USD’s Worth
The USD’s value is gauged by the U.S. Dollar Index (USDX), which includes a mix of currencies from the U.S.’s main trading partners: the euro, yen, pound, Canadian dollar, Swedish krona, and Swiss franc.
Domestically, the monetary base measures the amount of money in circulation, while M0 represents physical cash circulation and plays into the fractional reserve banking’s money multiplier effect.
Why the USD Stands Strong
Key factors contribute to the USD’s strength:
- Price Stability: Maintained stability with negligible devaluation or hyperinflation occurrences over time.
- Global Acceptance: Recognized as legal tender worldwide, boosting confidence.
- Reserve Holdings: Foreign governments and banks hold the USD to stabilize their own economies and currencies, often in U.S. Treasury bonds.
Example of USD’s Global Role: Petrodollars
In international trade, particularly crude oil, the USD’s role as a reserve currency shines. Since oil prices are listed in dollars, the euro-dollar trading dynamics significantly impacts global oil commerce.
Petrodollars—oil revenue in USD for nations who do not primarily use the dollar—are cycled through forex markets or held in reserves, including U.S. Treasury bonds.
USD FAQs
How Much USD Is in Circulation?
As of July 2022, over $2 trillion worth of USD is in circulation. Including money market instruments and other credit forms, this amount expands to beyond $21.6 trillion under the M2 measure.
Exchange Rate Query
In July 2022, the EUR/USD exchange rate is 1.02, meaning one euro equals $1.02 USD.
What is USDCoin?
USDCoin (USDC) is a stablecoin pegged to the USD with a typical value proximate to $1. It is not issued or managed by the U.S. government or Federal Reserve and does not serve as legal tender.
Related Terms: Federal Reserve, forex markets, benchmark currency, legal tender.
References
- House.gov. “Rep. Katko Reintroduces Legislation to Put Harriet Tubman on the $20 Bill”.
- Bureau of Engraving and Printing. “Historical Currency”.
- U.S. Treasury. “Distribution of Currency and Coins”.
- MarketsMedia. “Tradeweb Reports May Trading Volume of $25 Trillion”.
- Bank for International Settlements. “Foreign Exchange Turnover in April 2019”.
- TheICE. “ICE Futures U.S., U.S. Dollar Index”, Page 1.
- U.S. Federal Reserve. “Money Stock Measures - H.6 Release”.
- European Central Bank. “US Dollar (USD)”.
- Coinbase. “USDP Stablecoin”.
