What is the 'USD'

The USD is the abbreviation for the U.S. dollar 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 USD

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 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 dollars. The gold standard was formally abandoned in 1971, when the Bretton Woods exchange rates were abandoned.

Measuring the Weight of the USD

The value of the USD is measured against a basket of other currencies in the U.S. Dollar Index. This index measures the USD against currencies of the trading partners of the United States. These include the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona and the Swiss franc. The index goes up when the dollar gains strength against other currencies.

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 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 USD has never been devalued or hyperinflated to handle the 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.

RELATED TERMS
  1. Monetary Reserve

    A monetary reserve is a central bank's holdings of a country’s ...
  2. USD (United States Dollar)

    USD is the currency abbreviation for the United States dollar, ...
  3. Reserve Currency

    A reserve currency is held by central banks and other major financial ...
  4. National Currency

    A national currency is a legal tender issued by a central bank ...
  5. Currency Basket

    A currency basket is a group of currencies used to measure the ...
  6. Gold Standard

    The gold standard is a system in which a country's government ...
Related Articles
  1. Trading

    How the U.S. Dollar Became the World's Reserve Currency

    The U.S. dollar was first minted in 1914. Find out what occurred during the last century to make the U.S. dollar the world's reserve currency.
  2. Insights

    The US Will Remain the World's Reserve Currency

    Learn why the U.S. dollar is not in any danger of losing its reserve currency status and understand how China is pushing the yuan to be a reserve currency.
  3. Trading

    Forex: World's Biggest Market A Relative Newcomer

    Unlike the stock markets, the forex market is a truly new market. We’ll take a brief look at its origins and how it works today.
  4. Trading

    The 6 Most-Traded Currencies And Why They're So Popular

    Regardless of the reason, forex is an integral part of 21st century finance. And the more widely used and reliable the currency, the greater the likelihood of people buying and selling it every ...
  5. Insights

    The Go-To Currency In 50 Years

    Discover why the euro will likely become heir to the currency throne.
  6. Trading

    Profiting From a Weak U.S. Dollar

    Learn how to allocate your investments when the U.S. dollar is down.
  7. Trading

    The Pros & Cons Of A Strong Dollar

    As the U.S. economy has emerged from the Great Recession, the strength of the U.S. dollar has also improved.
  8. Trading

    Why These Currencies are the Safest in the World

    The safest currency in the world may surprise you.
RELATED FAQS
  1. Is there a world currency? If so, what is it?

    There is no such thing as a world currency. However, since World War II, the dominant or reserve currency of the world has ... Read Answer >>
  2. How are international exchange rates set?

    Knowing the value of your home currency in relation to different foreign currencies helps investors to analyze investments ... Read Answer >>
  3. How can I trade in cross currency pairs if my forex account is denominated in U.S. ...

    The forex market allows individuals to trade on nearly all of the currencies in the world. However, most of the trading is ... Read Answer >>
  4. How do central banks acquire currency reserves and how much are they required to ...

    A currency reserve is a currency that is held in large amounts by governments and other institutions as part of their foreign ... Read Answer >>
  5. What are key economic factors that can cause currency depreciation in a country?

    Read about the causes of currency devaluation, and find out how to differentiate between relative and absolute currency devaluation. Read Answer >>
Trading Center