What Does USD Stand For?
Let me tell you directly: USD is the currency abbreviation for the U.S. dollar, represented by the symbol $, and it stands as the official currency of the United States of America. Over the past several decades, it has held the position of the world's primary reserve currency, and it's managed by the Federal Reserve, which is America's central bank.
In the foreign exchange markets, or forex as it's commonly known, the USD pairs most frequently with other currencies. Think of pairs like EUR/USD, USD/JPY, and GBP/USD. Beyond the U.S., the dollar is the official currency in places like the Marshall Islands, Panama, and Ecuador. You'll also find it unofficially accepted in local exchanges in various other countries around the world.
Key Takeaways on USD
To break it down simply, USD is the three-letter abbreviation for the U.S. dollar. This currency is the legal tender in the United States and functions as a global reserve in international trade and financial markets. It was once tied to the gold standard but has operated as a free-floating fiat currency since 1971. In the international forex market, USD is the most traded currency, with EUR/USD being the most active pair. It makes up nearly 90% of all foreign exchange transactions, according to reports.
Understanding the USD
The USD is the currency of the United States, shown with the $ symbol. You can divide one dollar into one hundred cents. Current banknotes come in denominations of $1, $2, $5, $10, $20, $50, and $100. Each one features a president's portrait on the front, except the $100 bill which has Benjamin Franklin, and there's talk of putting Harriet Tubman on the $20 soon.
Higher denominations like $500 and $1,000 used to exist but stopped circulating in 1969. Coins are made in values of 1 cent, 5 cents (nickel), 10 cents (dime), 25 cents (quarter), 50 cents (half dollar), and $1. The Treasury Department produces these banknotes and coins, then ships them to Federal Reserve banks for distribution.
USD dominates the international foreign exchange market, the world's largest financial market with a daily average volume of nearly $1.2 trillion as of May 2022. This makes it a benchmark currency, readily accepted in transactions everywhere. In fact, the Bank for International Settlements' 2019 triennial report shows USD in about 88% of all forex transactions.
A Brief History of the USD
The USD has been the official U.S. currency since the National Currency Act of 1785. Before that, the country relied on unreliable continental currency, British pounds, and foreign coins. Initially, dollars were only in coin form, with paper notes starting in 1861, valued based on gold, silver, and copper prices.
Congress made various changes to the USD's design, value, and backing until the Federal Reserve Act of 1913 formalized its oversight. After that, dollars became Federal Reserve notes, redeemable for precious metals at Federal Reserve banks or the U.S. Mint.
Redemption ended with the abandonment of the gold standard in 1933 under President Roosevelt, who banned private gold ownership. The 1944 Bretton Woods Agreement shifted major currencies to fixed exchange rates, with governments selling gold to the U.S. for $35 an ounce in dollars. This system ended in 1971 when Bretton Woods rates were dropped.
Now, the USD floats freely on global forex markets. In this post-Bretton Woods era, it's the reserve currency for most countries. Central banks hold dollar reserves instead of gold and silver to hedge against inflation. By the way, dollar bills are sometimes called 'greenbacks' due to the green ink on their backs.
Measuring the USD Value
You can measure the USD's broad value using the U.S. Dollar Index, or USDX, which includes a basket of currencies from major U.S. trading partners: the euro at 57.6%, Japanese yen at 13.6%, British pound at 11.9%, Canadian dollar at 9.1%, Swedish krona at 4.2%, and Swiss franc at 3.6%. The index rises when the dollar strengthens and falls when it weakens.
Inside the U.S., the Fed tracks dollars in circulation through money-supply metrics. The monetary base, M0, is the total cash in banknotes and coins. As this base grows, the fractional reserve system expands the money supply via the multiplier effect.
Advantages of the USD
Several factors make the USD appealing as a reserve currency, but its long-standing price stability is key. Unlike some major currencies, it has never been devalued for debt reasons or hit by hyperinflation.
No U.S. dollar has ever been refused as legal tender, building strong confidence in its soundness. This leads to its use in denominating global financial, debt, and commodity transactions. Foreign governments and central banks hold USD reserves, often as Treasury bonds, to stabilize their economies and currencies.
Example of USD: Petrodollars
Consider petrodollars as a clear example of USD in international trade. Much of the world's oil comes from the Middle East, Russia, Norway, South America, and other places, but the market prices it in dollars per barrel. Payments to non-U.S. exporters in USD are called petrodollars, a main revenue source for those nations.
Since these countries don't use USD domestically, they build reserves and recycle them through forex markets or by buying U.S. Treasuries to convert to local currency.
USD FAQs
How much USD is in circulation? As of July 2022, the Federal Reserve reports over $2 trillion in physical currency. Using the M2 measure, which includes non-cash like deposits and money market instruments, it exceeds $21.6 trillion.
How many U.S. dollars to buy 1 euro? In July 2022, the EUR/USD rate is 1.02, so one euro equals $1.02, or one dollar equals about €0.99. This pair is the most traded in forex.
What is USDCoin? USDC is a stablecoin pegged to $1 USD, with a price around $0.95 as of July 30, 2022. It's a cryptocurrency tied to an external value, but it's not issued by the U.S. government or Fed, so it's not legal tender.
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