What is USD?

The USD is the abbreviation for the U.S. Dollar, the official currency of United States of America and the world's primary reserve currency.

Key Takeaways

  • The USD is the abbreviation for the U.S. dollar, the official currency of United States of America and the world's primary reserve currency.
  • 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 of over $5 trillion.
  • USD accounts for approximately 88% of all foreign exchange transactions, according to a 2016 Bank for International Settlements (BIS) report.

Understanding USD

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 of over $5 trillion. As such, the USD is considered a benchmark currency and is readily accepted in transactions worldwide. USD accounts for approximately 88% of all foreign exchange transactions according to a 2016 Bank for International Settlements (BIS) report.

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.

The History of the USD

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 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 Franklin D. Roosevelt prohibited 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 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.

Measuring 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.

The USD Today

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. Many factors work to make the USD attractive for this purpose, but the dollar's stability might be the most important. Unlike other major currencies, the USD has never been devalued or hyper-inflated to handle the country's debt. 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. (For related reading, see "How the U.S. Dollar Became the World's Reserve Currency")