Technical Terms

Dollar is the official currency and monetary unit in a number of countries namely United States of America, Australia, Barbados, Belize, Bermuda, Fiji, Guyana, Hong Kong, Jamaica, Liberia, New Zealand, Singapore, the Solomon Islands, Trinidad and Tobago, and Zimbabwe. Some of the countries above mentioned have different names to their currencies in their native languages but dollar is the name for them in English. The term dollar is also used in terms of international dollar that is referred to the unit of currency that has the equal purchasing power as the US dollar in the United States at a given point in time "$" sign denotes dollar and "cents" form the subunit to the currency.

United states dollar is the most important currency and it has large sized span of usage in the world. According to the ISO 4217 standard, the US dollar is depicted by the currency code USD and the numeric code 840. US dollar came into existence when the Congress of the Confederation of the United States adopted it on July 6, 1785. It is used as an official currency as well as a de facto or ‘in practice’ currency in several countries.

Overview

Since the procurement of the dollar as the official currency of the United States, it has dominated the world economics. The predominance of the currency is clear from the fact that more than fourth-fifths of the world trade transactions and around half of the world exports is termed in US dollar’s context. Moreover, all the loans and forwards done by the International Monetary Fund are also in dollars. Many countries have independently adopted the US dollar as their official currency to have more financial security through the process of dollarization in which the residents of a country start to use the currency of the other country parallel or instead of their domestic currency. The list of the economies that were dollarized officially and use US dollar as their national currency are

• British Virgin Island

• East Timor

• Ecuador

• El Salvador

• Marshall islands

• Federated states of Micronesia

• Palau

• Panama

• Pitcairn islands

• Turks and Caicos islands

The United States dollar also acts as the standard unit in the international market for commodities. The most important commodities that are traded in terms of dollar are gold and petroleum. Major multinational companies in the world, which have less or no linkage with the USA, also prefer to trade their products in dollars so as to gain competitive edge and promote exports. A number of countries and institutions over the globe have appropriate percentages of US dollar in their foreign exchange reserves making it the leading reserve currency among all. Most of the reserves of the currency are held in the denominations of $100.

Another fact to be observed is that the US dollar notes present outside USA are larger in amount as compared to the notes present in the country. Some economists believe that it helps US to show a trade deficit each year on a consistent basis and restricting the depreciation rate of the dollar. Most recently, the US dollar has been facing a stiff competition from the currency Euro that has leaded to a depreciated value of dollar.

The history of the world’s most dominating currency is quite an interesting one as it involves many countries and various continents. The name dollar is an anglicized version of the word Thaler that was derived from the term Joachimsthaler referred to the first silver coins minted in Bohemia in 1519. The European countries at that time adopted the anglicized forms of this term to denote their own currency. Bohemia, now Slovenia, adopted the word as ‘tolar’, Netherlands as ‘daalder’ and Sweden, Denmark and Norway as ‘daler’.  The name dollar also emerged at that time when it was used as Spanish peso and Portuguese eight-real piece as Spanish dollar.

This Spanish dollar traveled most of the territories and colonies held by Spain and also in British colonies, thirteen among them in North America, due to the shortage of British coins. These thirteen states later united and rebelled and after the American revolutionary war, formed the United States of America. After independence, British currency, pound, was replaced by the newly chosen currency, dollar.

There is no fixed, well-established theory regarding the origination of the ‘$’ sign that denotes the currency. This symbol does not have a long history as in the case of name 'dollar'. But still, the origination of the symbol is surrounded with much controversy. The most popular theory of them all is the United States abbreviation theory. It says that the "$" is formed when a capital "U" is superimposed on a capital "S" and then the lower part is dropped. Another theory i.e. the Peso abbreviation says the dollar sign is formed when a capital "S" is superimposed on capital "P" and keeping just the upward stroke of it. Shilling abbreviation theory says that the dollar sign uses the abbreviation of shilling i.e. "s" and a strike through vertical line is used to denote that it is an abbreviation as in the case of pound.

The volatility in the foreign exchange rates depends upon a numerous macro economic factors that have different degrees of importance to different economies of the world. Some special and exceptional factors affecting the rates may also exist in the case of different countries. Following are shown the common factors on which the foreign exchange rate depends

• Flow of imports and exports between the countries
• Flow of capital between the countries
• Relative inflation rates
• Fluctuation limits on exchange rate imposed by the governments of the countries
• Merchandise trade balance
• Rate of inflation in the country
• Flow of funds between the countries for the payment of stock and bond purchases
• Relative growth
• Short term and long term interest rate differentials
• Cost of borrowings