The US dollar: The most traded currency in the world |
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The US dollar: The most traded currency in the world

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The history, details and future of the US dollar.

The US dollar (USD, $) is the official currency of the United States of America and is a Federal Reserve Note. The US dollar remains the world’s most commonly traded currency and it pairs with every other major currency. Many countries use the USD as its legal currency such as Panama, Ecuador, East Timor, El Salvador, Palau and Zimbabwe. American money is also known as greenbacks, dough, bucks and dead presidents.

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Value and exchange rates of the US dollar

While the US dollar continues to hold its own in the forex market, its buying power dropped by more than 95% from 1774 to 2012. The table below shows just how much one could purchase in terms of equivalent amount of goods in any given year.

Year Equivalent buying power (USD)
1774 $1.00
1780 $0.59
1800 $0.64
1850 $1.03
1900 $0.96
1950 $0.33
1960 $0.26
1970 $0.20
1980 $0.10
1990 $0.06
2000 $0.05
2010 $0.035
2011 $0.034
2012 $0.03

There are many currencies that peg to the US dollar, and it’s commonly used as a benchmark in forex trading. Just about every central bank in the world holds USD reserves. Because of this, the USD has a direct effect on the commodity market.

The Federal Reserve was formed in December 23, 1913 to deliver ‘elastic’ currency that could noticeably change in quantity over short time periods. This was different than with previously common high-powered money forms like national banks note, silver coins and gold. Though, looking at the long-term picture, the gold standard had worked well in the past at keeping prices stable. For example, there was no significant change in the value and price level of the USD from the 1880s to 1914.

War always has a negative effect on a nation’s currency. The American Civil War, World War I and World War II led to a significant decline in the value of the USD. During WWI and WWII, the Federal Reserve had initial success in maintaining the USD’s value and price stability and managed to reverse the inflation caused by World War I, resulting in stability in the 1920s. However, prices in the US experienced more than 30% deflation during the 1930s.

After World War II, the establishment of the Bretton Woods system fixed the value of gold to USD 35 per ounce, anchoring the value of the USD to the value of gold. The US government began overspending in the 1960s, creating doubt as to the ability to continue to convert the US dollar to gold. Gold stocks began to fall because investors rushed to convert US dollars to gold, which led to a decline in value of the USD.

With the threat of a currency crisis looming large, and with growing fears that the US could no longer convert dollars to gold, President Nixon decided to do away with gold convertibility in 1971, therefore ending the Breton Woods system. The value of the USD was in the hands of the Federal Reserve, it continued increasing the supply of money, which led to a further decline in value during the 1970s. The USD lost almost two thirds of its value from 1965 to 1981.

Once Paul Volcker was elected as Chairman of the Federal Reserve in 1979, there was a tightening in the supply of money and inflation fell during the 1980s, which led to the stabilization of the USD. However, from 1981 to 2009, the USD dropped to less than half of its value.

Its exchange rates have witnessed noticeable shifts against major currencies over time, as you can see in the table below.

1990 1999 2000 2005 2010 2015 2016
Euro 0.9392 1.0859 0.8038 0.7549 0.9016 0.9041
Pound sterling 0.5633 0.6183 0.6614 0.5500 0.6474 0.6544 0.7405
Canadian dollar 1.1667 1.4858 1.4852 1.2107 1.0305 1.2791 1.3255
Chinese renminbi yuan 4.792 8.2779 8.2779 8.1949 6.7699 6.2836 6.6430
Indian rupee 17.492 43.052 44.935 43.929 45.657 64.1233 67.175
Swiss franc 1.3901 1.5032 1.6892 1.2447 1.0431 0.9618 0.9853
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History of the US dollar

The United States started issuing ‘continental currency’ in 1775 after passing the Mint Act in 1772. At that point the dollar was worth 24.056 g of silver. These were comparable to the Spanish dollar in composition and style. Until 1875, the US used Spanish dollars and Mexican pesos as currency.

There was a shift to the gold standard in 1834, when one dollar was worth 1.50 g. The Civil War led to the issuing of paper money in 1862, though gold and silver coins were still used.

In 1900, the Gold Standard Act did away with the bimetallic standard and went on to define the dollar as 1.505 g of gold. An executive order issued by President Roosevelt in 1933 confiscated all gold coins, changing the gold standard to 0.888 g until 1968. Silver coins were issued until 1970.

The US pegged its currency to gold from 1968 to 1975, the last peg exceeding USD40. After this point, the USD started floating freely in the forex market.

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Coins and banknotes of the US dollar

The United States minted its first dollar in 1794. It went on to mint coins in different denominations, and the ones mentioned below continue to be sued today.

  • Cent (Penny)
  • Nickel
  • Dime
  • Quarter
  • Half dollar
  • Dollar coin
  • American Silver Eagle $1 (1 troy ounce) silver bullion coin
  • American Gold Eagle $5 (1/10 troy oz), $10 (1/4 troy oz), $25 (1/2 troy oz), and $50 (1 troy oz) Gold bullion coin
  • American Platinum Eagle ($10, $25, $50, and $100 platinum coin)

It also issues banknotes in the following denominations, and each has a portrait of an American president:

  • One dollar (George Washington)
  • Two dollars (Thomas Jefferson)
  • Five dollars (Abraham Lincoln)
  • Ten dollars (Alexander Hamilton)
  • Twenty dollars (Andrew Jackson)
  • Fifty dollars (Ulysses S. Grant)
  • Hundred dollars (Benjamin Franklin)
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