Jake Miller
The US dollar is the world's primary reserve currency, with central banks across the globe holding a substantial portion of their reserves in US dollars. The US dollar is also widely accepted as a quasi-currency in several countries and territories alongside their local currency, particularly in tourist areas and for larger purchases. Foreign companies, entities, and individuals hold US dollars in foreign deposit accounts called eurodollars, which are outside the jurisdiction of the Federal Reserve System.
| Characteristics | Values |
|---|---|
| Number of foreign countries, territories, and municipalities that use USD as their currency | 11 |
| Number of U.S. territories that use USD as their currency | 5 |
| Countries that use USD as quasi-currency | Several |
| Countries that accept USD alongside local currency | Several |
| Countries that use a crawling peg model with USD | Several |
| Countries that use USD as official currency | Several |
| USD's share of global foreign exchange reserves held by central banks in Q3 2023 | 59% |
| USD's share of global official foreign exchange reserves in 2006 | 65% |
| USD's share of global official foreign exchange reserves in 2015 | 66% |
| Percentage of USD $100 notes held overseas | 75% |
| USD's impact on the U.S. government | Interest-free loan |
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What You'll Learn
US dollar as the world's primary reserve currency
The US dollar is the world's primary reserve currency, and it is held in large quantities by central banks around the world. In the third quarter of 2023, the US dollar made up roughly 59% of global foreign exchange reserves held by central banks, which is valued at $6.5 trillion. This is far more than the euro's share of 19.5% and the Japanese yen's 5.5%.
The US dollar's position is due to several factors, including the economic strength and stability of the US, the liquidity and depth of its financial markets, and the perceived reliability of its legal and institutional framework. The dollar is also the most commonly used currency for international trade and other transactions, even between countries that do not use the dollar domestically. This standardized use simplifies transactions and reduces exchange rate risk. The dollar is also the currency in which key commodities, such as oil and gold, are priced. As a result, fluctuations in the value of the dollar can have a direct impact on global commodity prices.
The US dollar's status as the world's primary reserve currency has given the United States several benefits. For example, it allows the US to borrow money more easily and extend the reach of its financial sanctions. The dollar's dominance also means that the US can borrow at lower rates than what is available in the rest of the world.
However, some experts argue that the dollar's hegemony could be at risk. Many emerging economies have increasingly sought ways to conduct trade in non-dollar currencies, especially after the Russian invasion of Ukraine and the COVID-19 pandemic. Despite these concerns, the US dollar remains dominant as the currency of choice for international transactions.
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Foreign companies, entities, and individuals hold US dollars
The US dollar is the world's foremost reserve currency and is widely held by foreign companies, entities, and individuals. This is done through foreign deposit accounts called eurodollars, which are outside the jurisdiction of the Federal Reserve System.
The US dollar's status as the world's primary reserve currency was established by the Bretton Woods Agreement in 1944. Despite all links to gold being severed in 1971, the dollar remains the world's foremost reserve currency. The Bretton Woods Agreement also set up the global post-war monetary system, creating rules, institutions, and procedures for international trade and access to global capital markets using the US dollar.
Another reason foreign companies, entities, and individuals hold US dollars is that the US dollar is seen as a stable and secure currency. After the 2007-2009 financial crisis, foreign investors increased their holdings of US dollar-denominated assets, as these assets offered higher returns and were seen as a stable investment. The US government's ability to borrow in its own currency with minimal interest rates and low default risk further adds to the stability and attractiveness of the US dollar.
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US dollar as official currency in 11 foreign countries
The US dollar is the official currency in five US territories and 11 foreign countries, territories, and municipalities. It is also the world's primary reserve currency, held in large quantities by central banks around the globe. The US dollar is also used as a quasi-currency in several other nations that commonly accept US dollars alongside their local currency.
The US dollar is widely accepted in many places, particularly in tourist areas and for larger purchases. It is also the de facto currency in many countries. The US dollar is the most widely used currency in international transactions, and a free-floating currency.
The US dollar is used as the official currency in the following 11 foreign countries:
- British Virgin Islands
- Ecuador
- El Salvador
- Marshall Islands
- Micronesia
- Palau
- Timor Leste
- Turks and Caicos Islands
- Caribbean Netherlands (Bonaire, Sint Eustatius, and Saba)
- Belize
- Panama
The US dollar's position as the world's primary reserve currency is a result of factors such as the economic strength and stability of the United States, the liquidity and depth of its financial markets, and the perceived reliability of its legal and institutional framework. These factors have established the US dollar as a safe haven during periods of market turbulence and attracted international investors, creating demand for dollar-denominated assets. The US dollar is also used in many international transactions due to its stability and wide acceptance.
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US dollar as quasi-currency in several countries
The US dollar is the world's primary reserve currency, and central banks across the globe hold a substantial portion of their reserves in US dollars. The US dollar is also used as a quasi-currency in several countries, which means that it is widely accepted for commerce and commonly used alongside the local currency.
The US dollar is used as a quasi-currency in several popular tourist and ex-pat destinations, including Canada, Mexico, Belize, Panama, and some areas of Costa Rica. In Panama, for example, the US dollar is legal tender alongside the national currency, the Balboa, which is also worth US$1. The US dollar is also widely accepted in retirement destinations for US ex-pats.
The widespread use of the US dollar as a quasi-currency is due to several factors, including the economic strength and stability of the United States, the liquidity and depth of its financial markets, and the perceived reliability of its legal and institutional framework. These factors have made the US dollar a safe haven during periods of market turbulence and attracted international investors, creating demand for dollar-denominated assets.
Additionally, the US dollar is often the preferred currency for international investments and savings due to its perceived stability. The value of the US dollar deeply influences global exchange rates, and movements in the dollar can have far-reaching effects on global trade, investment, and economic stability. The US dollar is also used as a benchmark for commodity pricing, with key commodities such as oil and gold typically priced in US dollars.
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US dollar used for larger purchases and in tourist areas
The US dollar is widely accepted in many countries, particularly in tourist areas and for larger purchases.
In some countries, the US dollar is widely used as the dominant currency, even though it is not the official legal tender. For example, in Mexico's northern border area and major tourist zones, it is accepted as if it were a second legal currency. Similarly, in Cambodia, US notes are preferred over the Cambodian riel for large purchases, with the riel being used for change. In Jamaica, the US dollar is widely accepted in tourist areas and is often preferred for larger transactions. In Vietnam, the US dollar is widely accepted in many places, especially in tourist areas and for larger purchases. In Belize, the US dollar is widely accepted, especially in tourist areas, at a fixed exchange rate of $2 BZD to $1 USD.
The US dollar is also used as a stable store of value or for high-value transactions in countries with volatile economies or less stable local currencies. For instance, in Honduras, the US dollar is used alongside the Honduran lempira, and is often accepted in tourist areas and for larger purchases. In Lebanon, due to the economic instability of the Lebanese pound, the US dollar is widely used for many transactions.
The US dollar is also the world's primary reserve currency, with central banks across the globe holding a substantial portion of their reserves in US dollars. This is due to factors such as the economic strength and stability of the United States, and the perceived reliability of its legal and institutional framework.
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Frequently asked questions
Yes, central banks across the globe hold a substantial portion of their reserves in US dollars. The US dollar is the world's primary reserve currency.
Five US territories and 11 foreign territories, municipalities, and countries use the US dollar as their official currency. These include the British Virgin Islands, Barbados, Belize, the Netherlands, Aruba, and Lebanon.
Yes, the US dollar is widely accepted in many places, especially in tourist areas and for larger purchases. It is also beneficial for international investments and savings due to its perceived stability.
You can exchange your currency for US dollars at local banks, online banks, credit unions, or currency exchange services. It is generally recommended to compare rates and avoid exchanging currency at airports or tourist locations, as these tend to have higher fees and less favorable rates.
