DEFINITION of 'USD'

The U.S. dollar is often abbreviated as "USD" in the world of currency trading. The international foreign exchange market, where dollars are traded for other currencies from around the world, also known as the forex market, is the largest financial market in the world, with a daily average volume of over $1 trillion.

BREAKING DOWN 'USD'

The U. S. dollar 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.

The History of the Dollar

Various acts of Congress modified the dollar'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 metal 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 Roosevelt prohibited private ownership of gold. In 1946, the Bretton Woods arrangement effectively forced all of the major currencies of the world to convert from a precious metal-based value system to one of fixed exchange rates, with governments allowed to sell gold to the United States for $35 an ounce, payable only in dollars. The gold standard was formally abandoned in 1971, when the Bretton Woods exchange rates were abandoned.

The U.S. Dollar in 2016

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 Europe, Asia and Africa keep a steady reserve of dollars as a hedge against inflation. Many factors work to make the dollar attractive for this purpose, but the dollar's stability may be the most important. Unlike other major currencies, the U. S. dollar has never been devalued or hyperinflated to handle its host country's debt. No dollar has ever been dishonored or refused as legal tender, which vastly increases confidence in the soundness of the currency. As a result, the U. S. dollar is used to denominate financial, debt and commodity transactions all over the world.

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