Dollar

The U.S. dollar is considered much more than just another national monetary unit, and many regard it as the world's global currency. It is considered an international currency because it has been the world's foremost monetary vehicle for invoicing and international transactions since the mid-20th century.

Legally, the U.S. dollar (USD, US$) is the official currency primarily of the United States and the U.S. territories of Puerto Rico, Northern Mariana Islands, U.S. Virgin Islands, American Samoa, Guam, and the United States Minor Outlying Islands. It is also the official currency of a number of other countries, such as Panama since 1904, Ecuador since 2000, and El Salvador since 2001. The U.S. dollar was born with the Coinage Act of 1792, which established the dollar as the basic unit of account for the United States. The first U.S. dollar coin was minted in 1794. The origin of the U.S. dollar is the Spanish dollar, or piece of eight.

On January 1, 1999, the introduction of the euro (€, ISO 4217 code EUR) as the common currency of the eurozone with a flexible or floating exchange rate regime challenged the hegemony of the U.S. dollar as the world international currency. Because the foreign exchange market is a zero-sum game, it was believed that the euro would be able to end the preeminence of the U.S. dollar, particularly after 2002 (Figure 1), when the U.S. dollar began to steadily depreciate in value against the euro. Many predicted that this would mark the end of the “Pax Americana” (the peace and prosperity period established at the end of World War II resulting from the hegemony of the United States).

The Federal Reserve has created the Trade Weighted U.S. Dollar Index (commercial U.S. dollar) to measure and reflect the strength of the U.S. dollar relative to the currencies of other countries with which the United States enjoys close and important trading ties. Figure 2 plots the commercial U.S. dollar and the Brazilian real. It illustrates that, since June 2004, the commercial U.S. dollar has been suffering a dramatic depreciation, which means that currencies included in the index have been appreciating against the U.S. dollar. For instance, this figure also shows that the Brazilian real has been appreciating against the U.S. dollar. Nevertheless, since 2010, the commercial U.S. dollar has been gaining strength and beginning a period of appreciation, which means that the Brazilian real has experienced a depreciation period by almost the same amount.

The prominence of the U.S. dollar as an international currency has helped it become the world's primary reserve currency. A reserve currency is a currency other than the national currency that is held by governments and institutions as part of their foreign exchange reserves. Further, a reserve currency is accumulated because of its capacity to act as a store of value, which helps a country reduce, or offset, the risk of its own economy and currency. The greater the importance of a particular currency is, the larger the held amount will be. In 2009, the amount of U.S. dollars held as reserve currency worldwide stood at historic record highs, despite economic problems in the United States, while the second most widely held currency was the euro.

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