The United States Dollar (USD) is the official currency of the United States of America and, by far, the most widely used currency in international trade and finance. Approximately 88% of all foreign exchange transactions involve the US dollar on one side, and it serves as the world's primary reserve currency — held by central banks and financial institutions around the globe as a store of value and a medium for international settlements.
The dollar has its roots in the Spanish silver dollar (the "piece of eight"), which was widely circulated in colonial America and remained legal tender in the United States until 1857. The Coinage Act of 1792 formally established the US dollar as the nation's official currency, defining it as a specific weight of silver or gold.
For most of the 19th and early 20th centuries, the dollar operated under the gold standard, meaning each dollar was convertible into a fixed amount of gold. This changed dramatically in 1971, when President Richard Nixon ended the direct convertibility of the dollar to gold — a decision known as the "Nixon Shock" — transitioning the global monetary system to fiat currencies.
Following World War II, the Bretton Woods Agreement (1944) established the US dollar as the anchor of the international monetary system, with other currencies pegged to it and the dollar itself pegged to gold at $35 per ounce. Even after the end of Bretton Woods in 1971, the dollar retained its dominant global role.
The Federal Reserve System ("the Fed"), established in 1913, is the central bank of the United States. It is responsible for conducting monetary policy — primarily by setting the federal funds rate (the benchmark interest rate) — with the dual mandate of maximising employment and maintaining stable prices (targeting approximately 2% annual inflation).
Decisions made by the Federal Open Market Committee (FOMC), which meets eight times per year, have an outsized influence on global financial markets. When the Fed raises rates, the dollar typically strengthens as higher returns attract foreign capital; when rates fall, the dollar often weakens.
Roughly 58% of global foreign exchange reserves are held in US dollars, far ahead of the euro (second at around 20%). This "reserve currency status" gives the United States significant economic advantages — often described as an "exorbitant privilege" — including lower borrowing costs and the ability to run persistent trade deficits without the currency crises that would afflict most other economies.
The dollar's reserve status is underpinned by several factors: the depth and liquidity of US financial markets, the rule of law and institutional stability of the United States, the size of the US economy (the world's largest in nominal GDP terms), and the widespread use of the dollar in commodity markets — oil, in particular, is almost universally priced and traded in USD (the "petrodollar" system).
The most traded currency pairs in the world all involve the US dollar. The top five by daily trading volume are EUR/USD, USD/JPY, GBP/USD, AUD/USD, and USD/CAD. The EUR/USD pair alone accounts for roughly 23% of all daily forex transactions globally.
The US Dollar Index (DXY) is a widely followed measure of the dollar's value against a basket of six major currencies (euro, yen, pound, Canadian dollar, Swedish krona, and Swiss franc), weighted by trade importance. A rising DXY indicates a strengthening dollar; a falling DXY indicates weakness.
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