United States Dollar (USD)
The United States Dollar (USD) is the currency most widely traded on the forex market. It’s dominance was even greater before the introduction of the Euro (EUR) and also for quite a time after the introduction of the Euro because any bank that wanted to change Euro into any other currency on the interbank spot market had to change it into USD first and then to the desired currency (unless the desired currency was a European currency or the Japanese Yen).
So a transaction were Euro was exchanged for Canadian Dollars (CAD) would be EUR to USD to CAD instead of just EUR to CAD. Today, the rules of the interbank spot market have changed and using the USD as a stepping-stone between EUR and the desired currency is no longer needed. This has of course decreased the number of forex transactions involving USD.
Still, the USD is an extremely important currency on the forex market and all of the three most traded currency pairs include the USD. These three pairs are the EUR/USD, the USD/JPY and the GBP/USD. Statistics obtained from the 2013 Triennial Central Bank Survey showed that for the year 2013, over 85% of all FX transactions included USD. This survey also showed that the EUR/USD was the most traded pair, making up almost one quarter of all transactions. Less than one fifth of all FX transactions were USD/JPY and less than one tenth of all FX transactions were GBP/USD.
Another sign of how important the USD is a a currency is the fact that it dominates the currency reserves for most nations.
USD FX Trade Fun Fact
Ever since the 19th century, FX traders have referred to the GBP/USD currency pair as cable. That’s because in the later part of the 19th century, exchange rate data for these two currencies was sent between Europe and North America by the then newly laid transatlantic telegraph cable.
Basic information about the United States Dollar
- The ISO 4217 code for the United States Dollar is USD (numerical: 840).
- The symbol for the United States Dollar is $ or US$.
- The central bank for the US dollar is the Federal Reserve System.
- 1 United States Dollar equals 100 cents. 1 cent equals 10 mill. There are no mill coins or bills in circulation.
- The United States Dollar is sold freely on the FX market.
- The United States Dollar used have a gold standard and a silver standard, but doesn’t have any of these any more. The gold standard for the USD was abolished in 1971.
The Federal Reserve System
The national bank system in the United States is very different from that of most other countries. Instead of a traditional central bank, the United States have a Federal Reserve System that includes a Federal Reserve Board (FRB) and a Federal Open Market Committee (FOMC). FRB has seven members, and these seven members are also a part of FOMC, together with 12 regional bank presidents (although only five bank presidents vote at any given time).
Monetary policy decisions made by the Federal Reserve System do not need approval from the president of the United States nor from anyone else in the executive or legislative branches of government. The president of the United States appoints a new member to the FRB when there is a vacancy, but the terms of the members span multiple presidential and congressional terms.
Federal Reserve System representatives comes from both the public sector and from the private sector, since the Federal Reserve System includes twelve regional Federal Reserve Banks, numerous privately owned banks and several advisory councils. Nationally chartered commercial banks in the United States are required to hold stock in the Federal Reserve Bank of their region.
The Federal Reserve System is self-financed to prevent congress from indirectly trying to control it via budget decisions. The salaries of the seven governors of the Federal Reserve Board are set by the federal government.
Another thing that makes the U.S. unique is that the United States Department of the Treasury – the entity that creates the national currency – is independent from the Federal Reserve System. In most countries, the entity that creates the currency is a part of the national central bank.
The Federal Reserve System was created by the Federal Reserve Act of 1913, and with this act, the U.S. Congress also established three key objectives for monetary policy:
- Maximizing employment
- Stabilizing prices
- Moderating long-term interest rates
Since the 1970s, the Federal Reserve System has focused on promoting a low and stable inflation rate rather than fighting inflation.
The USD is an official currency even in some non-US countries
The USD is a widely accepted currency world-wide and is extensively used for currency reserves. It has also been decreed official currency in several countries and territories that are not a part of the United States of America and its Overseas Territories. Non of these countries and territories have any right to issue USD or elect any representatives for the Federal Reserve System.
Examples of countries and territories where USD is the only official currency are El Salvador, Palau, Micronesia, The Turks and Caicos Islands, The British Virgin Islands, and The Marshall Islands. Even though the Netherlands have Euro as their currency, the USD is the official currency of the Caribbean special municipalities of the Netherlands.
Examples of countries with more than one official currency, and where the USD is one of these currencies, are East Timor, Ecuador and Panama.
In addition to this, there is currently about twenty countries and territories where the use of USD is so widespread that the USD can be considered a de facto, albeit unofficial, currency in the country.
Currencies pegged to the United States Dollar
At the time of writing, 27 currencies are pegged to the USD.
- Aruban florin
- Bahamian dollar (at par)
- Bahraini dinar (higher value)
- Barbadian dollar
- Belize dollar
- Bermudian dollar (at par)
- Cayman Islands dollar (higher value)
- Cuban convertible peso (at par)
- Djiboutian franc
- East Caribbean dollar
- East Timor Centavo Coin (at par)
- Ecuadorian Centavo Coin (at par)
- Eritrean nakfa
- Hong Kong dollar (narrow band)
- Iraqi dinar
- Jordanian dinar (higher value)
- Kuwaiti dinar (higher value)
- Lebanese pound
- Netherlands Antillean guilder
- Omani rial (higher value)
- Panamanian balboa (at par)
- Qatari riyal
- Saudi riyal
- Trinidad and Tobago dollar
- United Arab Emirates dirham
- Venezuelan bolívar
- Zimbabwean Bond Coin (at par)