What Does USD Stand for?
The USD is the currency abbreviation for the U.S. dollar ($), the official currency of the United States of America and the world’s primary reserve currency over the past several decades. It is managed by the Federal Reserve, America’s central bank.
In foreign exchange (forex) markets, the USD is the most common pairing in exchange with other currencies; for instance, EUR/USD, USD/JPY, and GBP/USD. The U.S. dollar is also the official currency for a small number of other nations such as The Marshall Islands, Panama and Ecuador, and is unofficially accepted in local exchange in several other countries around the world.
Key Takeaways
- USD is the three-letter abbreviation for the U.S. dollar.
- The USD is the legal tender currency of the United States, and also serves as a global reserve currency in international trade and financial markets.
- The USD was once based on the gold standard but has been a free-floating fiat currency since 1971.
- USD is the most traded currency in the international foreign exchange market, with the EUR/USD the most active currency pair.
- USD accounts for approximately almost 90% of all foreign exchange transactions,
Understanding the USD
The USD is the currency of the United States and is denoted by the symbol ‘$’. One dollar can be divided into one hundred cents. Dollar banknotes are currently issued in denominations of $1, $2, $5, $10, $20, $50, and $100. Each feature the portrait of a president on the front (with the exception of the $100 bill, which depicts Benjamin Franklin)—and the $20 bill may soon feature abolitionist Harriet Tubman on its front.
Notably, $500 and $1,000 banknotes used to circulate in limited amounts but ceased in 1969. Coins are minted in denominations of $0.01 (cent), $0.05 (nickel), $0.10 (dime), $0.25 (quarter), $0.50 (half dollar), and $1.00. Banknotes and coins are produced by the Treasury Department and shipped directly to Federal Reserve banks and branches for distribution and circulation.
The USD is the most traded currency in the international foreign exchange market, which facilitates global currency exchange and is the largest financial market in the world, with a daily average volume for May 2022 of nearly $1.2 trillion. As such, the USD is considered a benchmark currency and is readily accepted in transactions worldwide.
A Brief History of the USD
The USD has been the official currency of the United States since the passage of the National Currency Act of 1785. Before that, the United States used a patchwork system of unreliable continental currency, British pounds, and various foreign currencies. At first, the dollar was denominated only in coins, with paper currency introduced in 1861, and its value was keyed to the relative prices of gold, silver, and copper.
Various acts of Congress modified the USD’s design, value, and underlying commodities until the currency’s oversight was formalized with the Federal Reserve Act of 1913. After this reform, the dollar was technically a Federal Reserve note, redeemable on demand for an equivalent value of precious metals at any of the Federal Reserve banks or the U.S. Mint.
U.S. dollars ceased to be redeemable with the de facto abandonment of the gold standard in 1933, when President Franklin D. Roosevelt prohibited the private ownership of gold. In 1944, the Bretton Woods Agreement effectively forced all of the major currencies of the world to convert from a precious metal-based value system to one of the fixed exchange rates, with governments allowed to sell gold to the United States for $35 an ounce, payable only in U.S. dollars. The gold standard was formally abandoned in 1971, when the Bretton Woods exchange rates were abandoned.
Today, the USD is a free-floating currency on global forex markets. In the post-Bretton Woods world, the U.S. dollar acts as the reserve currency of most countries. Instead of stockpiling gold and silver, the central banks of the world keep a steady reserve of dollars as a hedge against inflation.
Dollar bills sometimes go by the slang “greenbacks” in reference to the green-colored ink that is characteristic of their reverse side.
Measuring the USD Value
The value of the USD is broadly measured by the U.S. Dollar Index (USDX), which is comprised of a basket of currencies affiliated with the major trading partners of the United States. These include the euro (57.6% of the Index), the Japanese yen (13.6%), the British pound (11.9%), the Canadian dollar (9.1%), the Swedish krona (4.2%), and the Swiss franc (3.6%). The index goes up when the dollar gains strength against other currencies and falls when it weakens.
Within the United States, the amount of dollars in existence is measured by one of the several money-supply (money stock) metrics put out by the Fed. The monetary base, or M0, is the aggregate total amount of dollars in circulation in the form of cash (banknote and coin). As the monetary base increases, the fractional reserve banking system expands the money supply via the money multiplier effect.
Advantages of the USD
Several factors work to make the USD attractive as a reserve currency and in exchange, but the dollar’s long-standing price stability might be the most important. Unlike some other major currencies, the USD to date has never been devalued to handle the country’s debt or seen bouts of hyperinflation.
Moreover, no U.S. dollar has ever been dishonored or refused as legal tender, which vastly increases confidence in the soundness of the currency. As a result, the USD is used to denominate financial, debt, and commodity transactions all over the world.
Because of its strength and stability, many foreign governments and central banks hold onto U.S. dollar reserves to help keep their own economy and local currency stable. This may be in the form of actual USD currency holdings, or (more commonly) as U.S. Treasury bonds.
Example of USD: Petrodollars
A good example of the USD in terms of international trade and as a reserve currency is in the global market for crude oil. Much of the world’s oil and gas is produced overseas, in the Middle East, Russia, Norway, South America, and elsewhere. The global oil market, however, is priced in dollars per barrel. USD paid for oil to non-U.S. exporters are known as “petrodollars“, which becomes a primary source of revenue for these nations.
Because those nations do not use USD as their primary currency, they develop reserves of dollars that must be recycled or spent in order to convert them into local currency. Forex markets are a primary channel for this, as well as the purchase of U.S. Treasuries to hold in reserves.
USD FAQs
How Much USD Is in Circulation?
According to the Federal Reserve, as of July 2022, there is just over $2 trillion worth of USD currency in circulation. This number swells to more than $21.6 trillion if you look at the M2 measure of the money supply, which includes non-cash items like money market instruments, deposits, and other credit money.
How Many U.S. Dollars Does It Take to Buy 1 Euro?
As of July 2022, the EUR/USD exchange rate is 1.02, which means that one euro (EUR) is equal to USD $1.02. Alternatively, you can say that one dollar is equal to Є0.99. The EUR/USD currency pair is often the most actively traded in forex markets.
What Is USDCoin?
USDCoin (USDC) is a stablecoin that is pegged to the value of $1 USD—the price as of July 30, 2022 is $0.95. A stablecoin is a class of cryptocurrency that derives its value from some external reference. USDCoin is not issued or managed by the U.S. government or Federal Reserve as is not considered legal tender in exchange.
