International use of the US dollar

Although the US dollar is the main currency of the United States, but do you know that it can be considered as a world currency?

Standard unit of currency in international markets

Commodities such as gold and petroleum are traded in the US dollar, hence the appellation petrocurrency which led to the term petrodollar.

Major non-U.S. companies list their prices in dollars

Some global companies such as Airbus which are however not American prefer to list their prices in dollars because of their globalized markets.

Official dollarization

Official Dollarization is the use by another country of the U.S. dollar as their official currency. This is the case of Panama which has been using the dollar besides its own Panamanian balboa since 1904; Ecuador (2000); East Timor (2000); El Salvador (2001); The former members of the U.S.-administered Trust Territory of the Pacific Islands (Palau, the Federal States of Micronesia, and the Marshall Islands), which have been using the U.S. dollar since 1944 decided to continue doing so after becoming independent; British Virgin Islands and Turks and Caicos Islands, two British dependencies also have been using the U.S. dollar since 1959 and 1973 respectively; Bonaire, Saint Eustatius, and Saba also adopted the dollar on January 1, 2011, following the dissolution of the Netherlands Antilles.

Countries that have adopted the U.S. dollar but issue their own coins are Ecuador (Ecuadorian centavo), Panama (Panamanian Balboa and East Timor (East Timor centavo coins).

Unofficial dollarization

Unofficial dollarization is the use in another country of the U.S. dollar as an officio legal tender. Hence the dollar is commonly accepted in Peru, Uruguay, Mexico’s border area and major tourist zones, close to the Canadian border, in Cambodia where they are preferred to the Cambodian riel, and in Afghanistan after the U.S. invasion. In many African countries also people prefer the dollar to the local currency which in some cases are considered only second to toilet paper.

Competition from the euro

Since it was introduced in 2002 as a European single currency, the euro has been gaining ground against the dollar as a world currency. This is due to a set of circumstances, such as:

-          the Iraq war costs from 2003 which made the dollar to depreciate steadily in value against other major currencies.

-          the lowering of interest rates in September 2007 by the Federal Reserve as a fallout from the subprime mortgage crisis in 2008 and again in March 2008, jacked the euro to a record high of $1.6038, reached in July 2008.

-          the trade deficit.

-          a variety of other factors, including a major spike in oil prices

-          the decreasing role of the dollar as a major reserve currency.

Sharp reversal

The onset of the global financial crisis in late 2008 brought about a sharp turnaround. At that time investors saw U.S. treasuries and Japanese government bonds as safe-haven investments from the financial turmoil, and the U.S. dollar sharply rose against other currencies, including the euro. But as at the same time countries such as China, India and Russia announced their intentions to diversify their foreign reserve portfolios away from the U.S. dollar, the question is: how long will the U.S. dollar continue to be the sole de facto world currency.