What Countries Use the US Dollar?
The US dollar is more than just the currency of the United States; it's a global powerhouse used by countries worldwide. Whether as legal tender or alongside local currencies, the US dollar plays a significant role in international trade and finance. In this article, well explore what countries use American dollars, where it circulates alongside local money, and why its influence extends far beyond US borders.
Overview of the US Dollar as a Global Currency
The US dollar (USD) has held a dominant position in global finance since the mid-20th century. After World War II, the Bretton Woods Agreement established the USD as the backbone of the international monetary system, linking it to gold and making it the preferred currency for trade and investment. Even though the gold standard was abandoned in the 1970s, the US dollar remained crucial for international transactions.
Today, the USD is the world's primary reserve currency, held by central banks across the globe to stabilise economies and facilitate trade. As of Q2 2024, nearly 60% of all global foreign exchange reserves are in dollars, and it accounts for 88% of forex trades (as of April 2022). The USD is used in pricing major commodities like oil, gold, and metals, further solidifying its role in global markets. Want to observe how prices of these commodities have changed over the years? Head over to FXOpens free TickTrader trading platform to get started with real-time charts.
Countries often hold USD as a hedge against their own currencies' volatility or to back their financial systems. Whether through official dollarisation or pegs, many economies depend on the USD for economic stability and international trade.
What Countries Use the US Dollar?
Several countries around the world have adopted the US dollar as their official currency, a practice known as dollarisation. This usually happens when a nation decides that using the USD will provide greater economic stability than their local currency, particularly in countries that have struggled with high inflation or political instability.
So how many countries have dollar currency?
- Ecuador: After a severe economic downturn, Ecuador adopted the US dollar in 2000. By using the USD, Ecuador stabilised its economy, controlled inflation, and regained investor confidence.
- El Salvador: El Salvador is a country where the US dollar is the legal currency. In 2001, it switched to the USD to increase economic stability and promote foreign investment. This move has helped the country maintain inflation at lower levels.
- Zimbabwe: After facing hyperinflation in the late 2000s, Zimbabwe abandoned its currency in 2009 and began using several foreign currencies, including the USD. However, the country has struggled with stability and frequently shifts between foreign currencies and local ones.
- Timor-Leste: Since 2000, Timor-Leste has used the USD to help stabilise its economy, which was heavily reliant on foreign aid and oil exports.
- British Virgin Islands: An overseas British territory, the British Virgin Islands, uses USD as its official currency due to its strong trade links with the US and its role as a financial hub.
- Turks and Caicos Islands: Another British overseas territory in the Caribbean, Turks and Caicos also uses the USD, mainly because of its heavy reliance on tourism from the United States.
- Micronesia, Palau, and the Marshall Islands: These Pacific island nations have long-standing agreements with the US, adopting the US dollar as part of their Compacts of Free Association, which provide economic aid and defence in exchange for using the USD.
- Bonaire, Sint Eustatius, and Saba: Collectively referred to as the Caribbean Netherlands, they officially adopted the United States dollar (USD) as their currency on January 1, 2011, following the dissolution of the Netherlands Antilles in 2010. The switch to the USD was aimed at enhancing economic stability and simplifying transactions with the United States, a key trade partner and significant source of tourism for the region.
Countries and Territories Where the US Dollar Is Used Alongside Local Currencies
In many countries and territories, the US dollar is used alongside local currencies, often for international trade, tourism, or to hedge against inflation. While not officially replacing local money, the US dollar plays a vital role in these economies. Heres a closer look at other countries that use the US dollar alongside local currencies:
- Panama: Since 1904, Panama has used the US dollar alongside its local currency, the balboa. The country chose the USD due to its strong trading ties with the United States, especially with the Panama Canal's importance to global trade.
- Cambodia: The riel is Cambodias official currency, but the US dollar is widely accepted and often preferred for larger transactions. Its estimated that over 80% of the countrys deposits and loans are in USD, reflecting its dominance in the economy, particularly in urban areas.
- Bahamas: The Bahamian dollar is pegged 1:1 to USD, and both are used interchangeably throughout the islands, especially in tourism-driven sectors. Many businesses and ATMs accept both currencies without issue.
- Bermuda: The Bermudian dollar is also pegged 1:1 to the US dollar, and both are widely accepted. The USD is frequently used in international trade and by tourists visiting the island.
- Belize: In Belize, the Belizean dollar is officially used, but the US dollar is accepted nearly everywhere. The local currency is pegged to the USD at a fixed rate of 2:1, and many businesses, especially those catering to tourists, price goods and services in US dollars.
- Liberia: This country uses the US dollar as its paper currency alongside the Liberian dollar. The USD is often preferred for larger transactions and savings, particularly in urban areas. It has been a significant part of the countrys financial system due to its historical ties with the United States.
- Myanmar (Burma): The Myanmar kyat is the official currency, but the USD is widely used, particularly in tourism, international trade, and foreign investment. Many hotels, airlines, and larger businesses will accept USD for transactions.
- Lebanon: The Lebanese pound is the official currency, but the US dollar is extensively used, especially given the recent economic crisis and hyperinflation. Many sectors of the economy rely on the USD to preserve value and enable trade.
- Argentina: Although the Argentine peso is the national currency, the US dollar is commonly used for savings and major purchases, such as property. High inflation and currency controls have driven many Argentinians to hold USD to protect their wealth.
- Peru: While the Peruvian sol is the official currency, the USD is often used for real estate, tourism, and larger transactions. Many Peruvians prefer to keep their savings in USD to avoid potential depreciation.
- Haiti: The Haitian gourde is the official currency, but the US dollar is widely accepted, particularly in the capital, Port-au-Prince. Many businesses and services cater to both the local population and tourists, pricing in both gourdes and USD.
- Vietnam: While the Vietnamese dong is the official currency, the US dollar is commonly used for larger transactions, particularly in the tourism and real estate sectors. Some high-end hotels and international businesses price goods and services in USD.
How the US Dollar Affects Economies That Dont Use It Directly
Even countries that dont use the US dollar directly feel its impact. Many nations peg their local currency to the USD, such as Hong Kong and Saudi Arabia. These currency pegs mean that when the value of the US dollar shifts, so does the value of their currency, affecting everything from inflation to trade competitiveness. A stronger USD can make these countries' exports more expensive and reduce demand, while a weaker dollar has the opposite effect.
Additionally, a large portion of global debt, particularly in emerging markets, is issued in US dollars. If the dollar strengthens, these countries face higher costs when repaying loans, which can strain government budgets and hurt economic growth.
Fluctuations in the USD also influence commodity prices, as goods like oil and gold are priced in dollars. When it rises, commodity prices often fall, impacting countries that rely on exports of these resources.
Challenges of Using the US Dollar
Countries that use USD, whether adopted or pegged to it, face significant challenges. The most pressing issue is the loss of monetary control. When a country uses the US dollar, it can no longer set its own interest rates or control its money supply, leaving it vulnerable to the decisions of the US Federal Reserve. For example, if the Fed raises interest rates, borrowing costs increase globally, even for economies that might not take advantage of tighter monetary policy.
Countries also lose the ability to devalue their currency to make exports more competitive, which can hinder economic growth. This lack of flexibility can be problematic during local economic downturns, as governments have fewer tools to stimulate their economy or combat inflation.
Additionally, dependence on the US dollar exposes economies to external shocks. A sharp appreciation in USD can hurt countries with significant USD-denominated debt, making it more expensive to service loans. While the US dollar provides stability, these countries sacrifice a degree of autonomy over their economic policies.
The Bottom Line
The US dollars global reach impacts economies worldwide, whether as legal tender or widely circulated paper currency. Understanding its role can help traders navigate international markets. If you're ready to take advantage of currency movements, consider opening an FXOpen account. With FXOpen, you'll gain access to the tools and platforms to trade major currencies, including the USD, and take advantage of our low-cost, high-speed trading environment.
FAQ
What Country Uses the US Dollar as Its Paper Currency?
Several countries use the US dollar as paper currency alongside their local money. Cambodia, Argentina, and Lebanon, for example, commonly accept USD for larger transactions despite having their own official currencies.
Does El Salvador Use USD?
Yes, El Salvador officially adopted the US dollar in 2001. The decision was made to stabilise the economy and reduce inflation, offering more stability in the financial system. Today, the USD is used for all transactions, making it the primary currency in the country.
Does Panama Use USD?
Yes, Panama has used the US dollar since 1904 alongside its local currency, the balboa. The USD is used for most transactions, and the balboa is pegged 1:1 with the dollar, meaning both currencies are interchangeable within the country.
Does Ecuador Use the US Dollar?
Ecuador has used the US dollar since 2000, after a severe financial crisis. The switch helped stabilise the economy, reduce hyperinflation, and restore public confidence in the financial system. Today, the USD is the sole official currency.
Does Puerto Rico Use the US Dollar?
Yes, as an unincorporated territory of the United States, Puerto Rico uses the US dollar as its official currency. The USD is used for all financial transactions, just like in any US state.
Where Does the US Dollar Have the Most Value?
The US dollar tends to have more purchasing power in countries with weaker local currencies. Examples include countries like Mexico, Vietnam, and Indonesia, where the USD can buy significantly more goods and services compared to stronger economies.
Read more: https://fxopen.com/blog/en/what-countries-use-the-us-dollar/
Text source: Forex Trading Blog
